Financial Statement Analysis and Valuation of Nets A/S

2017

MASTER’S THESIS COPENHAGEN BUSINESS SCHOOL

Supervisor: Lars Stage Thomsen Number of standard pages: 119 Number of characters: 214,285 Hand-in date: 15.05.2017

Rebekka Håland Amra Medic Cand Merc. AEF Cand Merc. AEF

Contents 1. Introduction and Motivation 1 1.1 Problem Statement 2 1.2 Methodology and Structure 2 1.2.1 Data Collection 2 1.2.2 Theories 3 1.2.3 Structure 3 1.2.4 Delimitations 4 2. Nets A/S and the Digital Payments Industry 5 2.1 Nets and its History 5 2.2 Historical Performance 6 2.3 Business Segments 9 2.4 The Digital Payments Industry 12 3. Theory about the Digital Disruption 15 3.1 The Payment Service Directive: Original and Revised 15 3.2 New Financial Value Chain 16 4. Peer Group 18 5. Theoretical Framework 21 5.1 Strategic Analysis 21 5.1.1 Porter's Five Forces 21 5.1.2 PEST Analysis 22 5.1.3 VRIO 23 5.1.4 SWOT 23 5.2 Financial Analysis 24 5.2.1 The Reformulated Income Statement and Balance Sheet 24 5.2.2 Profitability Analysis 24 5.2.3 Liquidity Analysis 25 5.2.4 Indexing and Common-size Analysis 26 5.2.5 Forecasting 26 5.3 Cost of Capital 27 5.3.1 Cost of Debt 28 5.3.2 Cost of Equity 29

5.3.3 Capital Structure 31 5.4 Valuation 32 5.4.1 Discounted Cash Flow (DCF) model 32 5.4.2 The Relative Valuation Approach 33 6. Strategic Analysis 35 6.1 Porter’s Five Forces 35 6.1.1 Threats of Potential Entrants 36 6.1.2 Buyers Bargaining Power 37 6.1.3 Suppliers Bargaining Power 39 6.1.4 The Threat of Substitutes 39 6.1.5 Competitive Rivalry Among Existing Firms 40 6.1.6 Summary Porter’s Five Forces 42 6.2 PEST analysis 43 6.2.1 Political Factors 43 6.2.2 Economic Factors 45 6.2.3 Social Factors 47 6.2.4 Technological Factors 48 6.3 The VRIO Framework 49 6.3.1 VRIO Summary 54 7. Financial Analysis 54 7.1 Reformulated Income Statement 55 7.2 Reformulated Balance Sheet 58 7.3 Profitability Analysis 61 7.4 Liquidity Analysis 69 7.5 Indexing and Common-size analysis 72 7.5.1 Revenue and Operating Expenses 72 7.5.2 Invested Capital 73 8. SWOT - Connecting the analyzes 74 9. Forecasting 75 9.1 Forecast Assumptions 75 9.1.1 Pro Forma Income Statement 76 9.1.2 Pro Forma Balance Sheet 85

10. Estimating Cost of Capital 91 10.1 Cost of Debt 91 10.2 Cost of Equity 92 10.3 Capital Structure 96 10.4 Conclusion Weighted Average Cost of Capital 97 11. Valuation 98 11.1 Pro Forma Cash Flow Statement 98 11.2 Discounted Cash Flow (DCF) model 99 11.3 Relative Valuation - Multiples 100 11.4 Sensitivity Analysis 102 11.4.1 Risk-free rate vs. beta 102 11.4.2 Terminal growth rate vs. WACC 104 11.4.3 Terminal growth rate vs. EBITDA b.s.i. margin 105 11.4.4 Net revenues & EBITDA b.s.i. sensitivity to currency variations 106 11.5 Scenario Analysis 107 11.5.1 Scenario 1 - Adapting to PSD2 107 11.5.2 Scenario 2 - The Swedish opportunity 109 11.5.3 Scenario 3 - Renewal of BankAxept contract 111 11.6 Summary Valuation 112 12. Discussion 113 13. Conclusion 114 14. References 116 15. Appendix 122

1. Introduction and Motivation The subject for our thesis is a valuation of Nets A/S, a company delivering digital payments in the Nordic payments ecosystem, and is currently the largest player within the Nordic digital payment industry. The company got listed on Nasdaq Copenhagen stock exchange in September 2016, which we find both very interesting and challenging. We wish to set our valuation in light of the payment industry’s new battlefield created by digital disruption.

Throughout four decades, Nets has been one of the driving sources behind digitalization in the Nordics and the company has brought businesses and customers closer to each other. With its particularly strong position in Denmark and Norway, Nets stretches across the whole Nordic with a growing presence in the Baltics as well. The firm aims to minimize the facilitating digital payments through an international network shortening the distance between purchased and paid.

The traditional financial services industry has already been reshaped to some extend as digitization of the industries has been ongoing for a number of years. We have been introduced to factors such as digital revolution, technologies related to the internet and big data. However, the global trend has lately accelerated to an extremely speed as digital disruption rapidly transforms the payment industry, painting the surroundings even more complex. It all indicates that we have come to a moment of change where the strongest, smartest and best developed players will in the end survive, while the rest must face the loss and raise their white flag.

The European Payment Council (EPC) has decided to open up the market and invite players outside the Nordic payment industry to participate in the value creation for customers. This action lead to a modification of the Payment Service Directive introduced in 2007 to the revised Payment Service Directive (PSD2). PSD2 includes new technical standards and guidelines aiming to improve the competition and innovation across and beyond Europe (Accenture, 2016, p.3). Together with the movement of FinTech companies’, firms with a digital target is expected to seize the opportunity to grow given the capabilities provided with the open application programming interfaces (APIs), and thus accelerate the remodeling of the financial services industry (Euro Banking Association, 2016, p.4). The changing regulatory environment as well as the rapidly growing market makes it a very exciting industry to analyze.

1.1 Problem Statement Through a fundamental analysis accompanied with diverse valuation techniques, our ultimate intention with this paper is to determine Nets’ performance and value. This will empower us with the ability to provide a recommendation of either buy, hold or sell to potential investors. As elaborated in the introduction, rapidly changes in the payment industry led us to the following problem statement:

“Considering the changes in the Nordic payment industry, what is the fundamental value of Nets’ equity, and what is the fair value of Nets share price as of December 31st 2016, compared to the market capitalization on Nasdaq Copenhagen stock exchange?”

1.2 Methodology and Structure To give the reader an overview of how the thesis is organized, we will in this section describe briefly which methods we have used to collect and organize data, theories as well as the structure.

1.2.1 Data Collection

This thesis is written from an individual analyst’s/investor’s point of view, hence only public available data and information is used. The majority of our data collection is from annual reports, equity – and market research reports, news articles, information from national statistics and central banks, and stock exchanges. Data on stocks, equity indices and interest rates is collected from Datastream provided by Thomson Reuters. Moreover, Bloomberg is used to collect key numbers from peers.

Furthermore, we assume that the information provided by Nets has a low degree of manipulation. However, Nets’ annual reports etc., might be biased in the direction of what fits the company best. We have also used analysis from other financial/investments banks- and companies to verify our own, as these companies have access to a lot more data and information than the authors of this thesis, hence we assume such sources to be credible. All data/sources used in the thesis will be referenced to in the text, and a full reference list is to be find in the end of our paper.

1.2.2 Theories

The major part of financial modeling, theories and calculations are based on Petersen and Plenborg (2012) and the updated edition Petersen, C.V., Plenborg, T., & Kinserdal, F. (2017), as well as Koller, T., Goedhart, M., & Wessels, D. (2010). Moreover, professor Damodaran’s theories are implemented in some parts in order to complement the theories and models. By using multiple theoretical sources allowing us to be as theoretical correct as possible, and gives us different viewpoints suggesting that there are several ways of solving the specific task.

As Nets operates in an industry facing high degree of digital disruption, and are subject to implementation of regulatory changes (PSD2) which is not assumed that the reader is familiar with, we have included a separate chapter that elaborates on these aspects. Moreover, we have incorporated a separate theoretical framework chapter before the analysis and valuation part, where we have examined the theoretical perspectives used in the thesis.

1.2.3 Structure

The thesis is structured into multiple parts in order to present it clearer to the reader, and make it easier to scroll back and forth when reading the paper. Each section is carefully thought out and included such that we are better able to answer our problem statement in the best possible way. The structure of the thesis is shown in Figure 1 below:

Figure 1 – Structure of thesis

Introduction

Nets and the digital

Theory about the Digital

Introduction of

Theoretical framework:

Data: Annual reports, Financial analysis: reformulated Strategic analysis: equity- and market income and balace sheet, analysis Porter's Five Forces, PEST, VRIO researchs reports, of profitability and liquidity, growth stock exchanges

SWOT

Decision making:

Cost of capital

Relative valuation Discounted cash flow VALUATION

Sensitivity, scenario,

Conclusion

Source: Own production

1.2.4 Delimitations

Due to factors such as data availability, time, and space limitation, some delimitations have been made: - Only publicly available information is used. - We assume the reader is familiar to some extent with the financial, economic and strategic theory, hence the models will not be explained in deepest detail. - The cut-off date of our valuation is 31st of December 2016, and information later than this date is not considered in the thesis. - A time period of 5 years is used to analyze historical data, despite in the estimation of cost of capital, where a time period of 20 years is used to estimate several parameters.

- A constant WACC is assumed in our valuation model. - We have not included peers in the profitability analysis as we argue that Nets does not have any direct peers with same business model, hence we find it less suitable. - Further assumptions and delimitations will be stated if necessary throughout the thesis.

2. Nets A/S and the Digital Payments Industry

This section presents an overview of Nets and the digital payments industry. It is of vital importance that we understand the mechanisms within the firm as well as the industry in order to perform a good valuation. Additionally, it gives the reader a better picture of the industry and what drives growth and profitability.

2.1 Nets and its History

Nets is a Danish-Norwegian IT-group that is one of North-Europe’s largest providers of payment cards and electronic payment solutions. The company connects a large number of businesses, banks, the public sector, merchants as well as consumers through an international network which facilitates digital payments.

Nets offers a broad specter of end-to-end IT solutions. The company builds on their comprehensive network and has a commitment to bring operations to their customers with focus on stability and security. Furthermore, the company offers services like payment cards to their consumers, payment solutions for merchants (i.e. bank terminals), as well as bank account services. With their modern and well known payment infrastructure, Nets has introduced several successful products in the Nordic payment industry, such as NemID, BankID, Dankort, BankAxept, Betalingsservice and Avtalegiro. Nets’ business model is split into three business segments; Merchant Services (MS), Financial and Network Services (FNS) and Corporate Services (CS). This is further described in section 2.3.

The firm’s history goes back to 1968, but the company in its present form was established in 2010 as a result of the merger between the Danish PBS Holding A/S and the Norwegian company Nordito AS (which is the parent company of BBS and Teller). The timeline from 1965 to 2016 is illustrated below:

Figure 2 – Historical timeline

Source: Nets.eu, n.d.,b

The company has around 2,500 employees in the Nordic region (Nets, 2016c). Nets’ business is mainly in Denmark, Norway, Sweden and Finland, but also present in Estonia as well as growing in other Baltic countries. The firm’s headquarters are located in Copenhagen, Denmark. In addition, the company has two branch offices in Oslo and local offices in Aarhus, Glostrup, Stockholm, Helsinki and Tallinn. (Nets.eu, n.d.,b).

In 2016, Nets processed 7.7+ billion card transactions (within issuing and acquiring) for over 300,000 merchants (including 30,000+ online merchants) and 240 banks, and more than 8 billion transactions for over 240,000 corporates. (Nets, 2017). The number of card transactions in 2015 was 7.3 billion (Nets, 2016a), underlining an increase by approximately 5% during 2016.

2.2 Historical Performance Nets’ financial performance The company got listed on Nasdaq Copenhagen on September 23rd 2016. According to Nets annual report 2016, the company’s financial performance improved significantly and delivered strong financial results after the IPO. Net revenues in 2016 increased by 8%, which was due to higher volumes, increased effectiveness from sales forces, and through acquisitions as well as strengthened commercialization of the business. The performance was significantly better in Sweden, with an increasing revenue of DKK 201M up to DKK 542M. (Nets, 2017, p.13).

Organic growth the same year grew by 7%. This growth was realized by an improved performance in FNS and in MS (organic growth by 10% and 13%, respectively). A small but solid growth by 2% in CS was also present this

6 year. Moreover, with an EBITDA b.s.i. margin expansion of 2.6% and reduction in debt, a stronger Nets has become reality. (Nets, 2017).

Table 1 – Financial highlights

Financial highlights (m) 2012 2013 2014 2015 2016 Income statement Net revenues 5962 6727 6546 6836 7385 EBITDA before special items 1077 1525 1663 2248 2619 EBIT 741 876 844 812 943 Profit for the year 698 613 652 119 -584 Balance sheet Total operating assets 9855 8156 8919 24593 25215 Goodwill 934 719 1318 14646 14720 Total equity 2334 2307 2387 5143 10090 Invested capital 1237 492 2566 16767 17615 Net interest-bearing debt -1097 -1815 179 11624 7525 Growth in revenue, net Revenue growth 7% 13% -3% 4% 8% Organic growth na na na 6% 7% Financial ratios EBITDA b.s.i. margin 18.1% 22.7% 25.4% 32.9% 35.5% EBIT margin 12.4% 13.0% 12.9% 11.9% 12.8% ROIC incl. Goodwill 65.0% 35.8% -0.9% 6.2% 26.5% Source: Nets Annual Reports 2012-2016

Share price performance Nets was listed at a share price of DKK 150. The timeline below illustrates Nets’ share price development after the offering. During the period after Nets got public, OMX Copenhagen CAP Index decreased by 2.5%.

Figure 3 – Share price development

23-sep-16 01-dec-1619-dec-16 31-dec-16

Nets was listed on Nasdaq Netswas included in Netswas included in Nasdaq's Share price at year- at DKK 150/share Nasdaq's OMXCB Index OMX C20 CAP Index end was DKK 123.6 Source: Own production/ Nets Annual Report 2016

The share price at December 31st 2016 was DKK 123.6, which corresponds to a 17.6% lower price than the listing price. During the period after the IPO, Nets has underperformed relative to OMXC20 CAP, and Nets share price underperformed by 16.7% relative to the index at year-end. Speaking of the negative share price development, there have been some recent news around contract losses in Denmark that to some extent might have impacted the share price.

First, the fact that Danske Bank replaced Nets with Bambora as the acquirer of international cards in MobilePay. Second, Nordea as well as the other Swipp banks are terminating the Swipp application, and are instead going together with the MobilePay team. (DNB Markets, 2017, p.5). The figure below illustrates Nets share price performance compared to OMXC20 and MSCI Europe Index. We have included the latter as we later in this paper will consider the European market as well.

Figure 4 – Nets’ share price performance relative to OMXC20 and MSCI Europe

Nets vs. OMXC20 (rebased) Nets vs. MSCI Europe (rebased) 160 160

150 150

140 140

130 130

120

Share priceShare DKK 120 Shareprice DKK

110 110

100 100 September-16 October-16 November-16 December-16 September-16 October-16 November-16 December-16

Nets OMXC20-CAP (rebased) Nets MSCI Europe (rebased)

Source: Own production/Bloomberg

Ownership structure AB Toscana (Luxembourg) Investment S.à.r.l. (hereafter AB Toscana), which also was the greatest shareholder before the IPO, has 39.9% of the total share in Nets after the IPO. Moreover, AB Toscana is not allowed to sell shares until end of March 2017. Of the capital stock in free float, Nets had consequently about 60% in 2016. Blackrock is the only other investor that holds more than 5% of Nets shares, with its 7.5% stockholding.

The free float Nets has approximately 23,000 shareholders, which are primarily small Danish retail investors holding about 5% of the free float. Furthermore, 24% of the free float is held by Danish investors. A considerable amount of this amount is related to shareholdings of the management and key employees. However, management cannot sell their Nets shares before September 2017. (Nets, 2017, p.49). The investors holding more than 5% of Nets share capital is shown in Table 2.

Table 2- Ownership structure

Ownership structure Share capital AB Toscana (Luxembourg) Investment S.à r.l. 39.9% BlackRock, Inc 7.3% Other shareholders 52.8% 100 %

Source: Own production/ Nets.eu (n.d.,a)

2.3 Business Segments Nets has, as already mentioned, three main business segments, with customers who come from all types of societies, also including all sizes of banks, corporations, merchants and public sector organizations. Nets’ comprehensive range of products and services are offered through their three main business areas, which is presented below. See Figure 5 for how the company’s revenues are divided.

Figure 5 - Share of net revenues per business segment

Share of net revenues in 2016 per business segment

MS 31% CS 38%

FNS 31%

Source: Own production/ Annual report 2016

Merchant Services (MS) MS offer their merchant customers payment acceptance solutions across channels like in-store, online and mobile. The business segment provides the Nordic region with different payment methods, including Visa, MasterCard, JCB, American Express, Union Pay and local payment methods as well. Regardless of what channel, these services make it possible for merchants to accept payments easy and without friction. The customers are also able to receive the settlement in their account, and get a detailed reconciliation information and statistics, all in different currencies which depends on both consumers’ preferences and what the merchant needs. (Nets.eu, n.d.,b). In 2016, MS amounted for about 31.4% of the company's revenue, and is the fastest growing business area (Nets, 2017).

Financial and Network Services (FNS) FNS provides a broad range of services to banks and financial institutions, including processing services to issuers of payment cards, primarily for banks in the Nordic region. In addition, FNS offers Card Management Systems, Fraud & Dispute Solutions as well as Mobile Services. Furthermore, the national debit card systems in Denmark and Norway, Dankort and BankAxept, are also operated and processed by this business segment. (Nets.eu, n.d.,b). FNS amounted to 30.8% of net revenue in 2016, barely making it the smallest business unit (Nets, 2017).

Corporate Services (CS) CS offers a payment platform for corporates mainly in Denmark and Norway, which are recurrent bill payments and credit transfer transactions. These services make it possible for most Danes and Norwegians to pay their bills via Nets' direct debit solutions BetalingsService and AvtaleGiro. Furthermore, CS provides solutions for clearing when offering instant payments across bank accounts and provides Denmark and Norway with the national digital ID systems, NemID and BankID. (Nets.eu, n.d.,b). The business segment had 37.8% of Nets’ revenues in 2016, and thus was the largest business unit in the firm (Nets, 2017).

Table 3 below compares the three business segments.

Table 3 - Comparison of business segments

Merchant Services Financial & Network Services Corporate Services

Main customers Merchants Banks Corporates, Banks & Governments

Payment acceptance solutions across Operates the domestic card schemes Payment platform in DK and NOR for channels (in-store, online & mobile) (Dankort & BankAxept) recurrernt bill payments and credit trasfer transactions Offering Broad range of payment methods Card Management Systems, Fraud and National clearing services Dispute solutions Outsourced processing services for Digital identities (NemID & BankID) issuers of payment cards

3000 2762 2764 2795 2317 2206 2273 1866 2097 2000 1687 Net Revenues 1000 (DKK millions) 0 MS FNS CS

2014 2015 2016

50.0% 41.0% 37.8% 40.0% 31.4% 32.0% 30.8% 27.0% 30.0% Share of net 20.0% revenues 10.0% 0.0% MS FNS CS

2015 2016

934 1000 811 893 880 792 719 560 517 426 500 EBITDA b.s.i (DKK millions) 0 MS FNS CS

2014 2015 2016

20 % 13 % 11 % 10 % 10 % 7 % Organic growth 2 % 2 % 0 % MS FNS CS 2015 2016

Source: Own production/ Nets Annual Report 2014-2016

2.4 The Digital Payments Industry The digital payments industry could be defined as a quite localised type of industry as regulations and local payment networks tend to vary from country to country. Along with different types of consumer acceptance, players in this type of industry have the opportunity to become local leaders if they know their domestic market well, and aim to take advantage of the coming innovations. (UBS Limited, 2016, p.40). There is no doubt that the digital payments industry is facing a period of high speed innovation including several payment solutions which might lower the use of more traditional payment methods (UBS Limited, 2016, p.36). In this section, we wish to give a short overview of the industry Nets is operating in before we go in more detail of the digital disruption and possible innovations.

The environment in the digital payments industry comprises of two types of players: integrated and specialized. Players covering several parts of the value chain acts as integrated players in the industry, while players that are operating in only one or a few components of the value chain are defined as specialized. (DNB Markets, 2017, p. 66). Due to several types of payments one can implement, and the fact that at least two parties has to be involved, the digital payments industry has a vast range of electronic transactions. The two types of transactions explained below are mainly the once Nets engage in.

Card-based payments A card-based payment is the typical choice of payment method between consumer and merchant payments. This type of payment uses both international schemes like VISA and Mastercard, and domestic networks such as Dankort and BankAxept in Denmark and Norway, respectively. The process in a typical transaction consists of four key roles which represents the four-party model, in addition to a fifth key actor providing the interconnection between the other actors in the process (UBS Limited, 2016, p.41). This is highlighted in Table 4. Nets acts as an acquirer in the MS business unit, and an issuer as well as payment network in the FNS segment.

Table 4 - The card-based payment process Consumer Issuer Merchant Acquirer Payment Network e.g. you and me e.g. Danske Bank e.g. IKEA e.g. Nets e.g. Visa

Provides the Guides the Provides the consmer with a transaction from merchant with credit or debit the acquirer, An entity that facilities like POS A person who card. The assigned by the aims to sell a terminals or wants to make a consumber can merchant, and to service or goods services such as purchase then carry on an the issuer online payment electronic responsible for gatewat transaction the consumer's card

Source: Own production/ UBS Limited, 2016, p.41

Account-based payments This type of payment takes place through an account-to-account transaction, hence no use of card is needed. The payment is handled by the bank who transfers a given amount of money to the recipient’s bank account, on behalf of instructions from the sender. There are a handful of services who assist in account-based payments, and Nets itself provides schemes handling bill payments in both Denmark and Norway, as mentioned above. Moreover, peer-to-peer payment has lately been an attractive area where many new startups have entered the payment industry. (UBS Limited, 2016, p.42). Table 5 illustrates some of the most popular account-based payments.

Table 5 - The most common account-based payments

Bill/recurring Peer-to-peer Currency payments payments conversion e.g Nets e.g. PayPal, MobilePay e.g. TransferWise Providers of Mostly developed Handled by electronic for specific international solutions with regions, where remittance firms permission from typical methods with the purpose card user, are are completed by of reducing fees able to debit their using mobile in relation to account once a phone numbers international and month to pay a or people's email cross-currency specific bill. addresses. transactions.

Source: Own production/ UBS Limited, 2016, p.42

The Nordic payment industry The Nordic countries represent an attractive area for digital transactions as the population across the Nordics show a high level of adopting non-cash payments and technology in general. The Nordic payment industry experiences a rapid and significant change in technology, mainly within front-end solutions. Several new devices and services has been launched in the recent years, hence the complexity in the market has increased. (DNB Markets, 2017, p.86). Moreover, the global trend of digitization is changing the way individuals behave and thus how companies run their business. This is transforming the industry as well, and not just in the Nordics, but across the entire world. Market Research by Deutsche Bank (2016, p.25) expect the electronic Nordic payment market to grow by 4% in the period from 2015 to 2020, mainly as a result of the shift from cash to non-cash payment methods.

Especially the development within usage of mobile device has lately experienced a significant increase. According to CEO Idar Kreutcer from Finans Norge, consumers tend to behave more digital in their usage of bank services which he underlines by the 10% increase in share of users within mobile banking in Norway from 2014 to 2016 (Finans Norge, 2016). Even more surprisingly is the fact that users of online banking have likewise escalated during the same period. This confirms people's requests of full control over their bank accounts on a daily basis.

The Nordic payment industry is thus facing interesting turnings points taking into account the digital trend’s characteristics as chairman of the European Payments Council, Javier Santamari said: “People expect speed everywhere, including for their payments” (Equenswordline Blog, 2016, paragraph 4).

3. Theory about the Digital Disruption

3.1 The Payment Service Directive: Original and Revised

The original purpose of PSD In order to reduce the high expenses on European payments, banks developed the Single European Payments Area (SEPA), with the main goal to improve efficiency of international payments and turn the fragmented national market for euro payments into a field similar to the domestic market (European Payments Council, 2017). Yet, SEPA did not have any legal status by itself. For that reason, a legal framework was developed in 2007 named the Payment Service Directive (PSD). The directive included rules for payment services such as information requirements as well as rights and obligations related to the use of these services (EUR-Lex Access to European Union Law, 2016). Thus, the purpose of PSD was to increase consumer protection as well as guarantee fair and open access to payment market (European Commission Press Release Database, 2007). By increasing the competition level and opening up the market for non-banking institutions, PSD was targeting lower prices and greater choice for users (European Commission Press Release Database, 2007).

However, PSD has lately been facing problems within card, internet and mobile payments. This have led to certain markets not functioning optimally as well as several drawbacks in relation to the existing legal plans. To name a few, market fragmentation, ineffective competition and diverse charging between member states, in addition to emerging third party providers (TPPs) that are not covered by the current legal framework. The European Parliament and the Council saw it necessary to adapt a revised payment service directive (PSD2) in order to improve existing rules and include a new digital payment service. (EUR-Lex Access to European Union Law, 2013). In the following we will elaborate more on PSD2.

The purpose of PSD2 The main purpose of PSD2, which is to be incorporated by January 13th 2018, is to support better integration and create a payment market more suited for competition (EUR-Lex Access to European Union Law, 2017). PSD2 will aim to modernize the regulations in line with developments in the marked, open up for new thinking in the field and ensure safer technical payments. Furthermore, the directive intends to increase consumers’ freedom of choice and reduce the costs related to use of payments services.

Key points in the directive is to increase the geographical use of transactions and the information following the transaction, thus allowing for wider application area. Moreover, PSD2 aims to harmonize the Member States policies on rules related to surcharging by removing surcharges for the use of credit or debit card by consumers. (Regjeringen.no, 2016). In line with the regulatory decisions on surcharging, interchange fees related to card- based transactions charged between banks has now been put a cap on. Thus, for merchants accepting consumer debit and credit cards, the directive is hoping to drive down the costs (EUR-Lex Access to European Union Law, 2016). Nevertheless, PSD2 legislates that potential loss in relation to abuse or other irregularities that the consumer has been subject to through use of payment services will be limited by reducing the payment service user liability from EUR 150 to EUR 50. Last, but not least, new services and providers welcomed by the directive to the EU market is presented in Table 6 below.

Table 6 - Newly regulated service providers/issuers under PSD2

Initiates a payment order requested by the dealer's website from the consumer’s payment Payment Initiation Service account, and acts as an alternative to purchase completed by credit card. Provider (PISP) This allows the consumer to make an online purchase and pay for it by a regular credit transfer.

An online service that provides consolidated information on one or more payments accounts. Account Information Service Consumers will better handle their personal finances by allowing a payment service user at Provider (AISP) any time to have transparency of their financial situation.

Administered by a payment service provider which, on behalf of an agreement between the payer and payment service provider, grants the payer with a payment instrument that is Payment Instrument Issuer (PII) applicable to initiate and process the payer’s payment transaction where he is located. (verification on available funds) This is often a combination of PISP and AISP. Source: EUR-Lex Access to European Union Law, 2017/ Danske Bank Financial Markets, 2017

3.2 New Financial Value Chain

It is reasonable to assume that PSD2 will open a new battlefield. With some impact, TPPs have already positioned themselves in the market, however, with standardized interfaces it is expected that the impact will be significant. By opening up the access to accounts, third parties will have the possibility to position themselves closer to the customers, meaning that they are able to come between banks and their customers which will result in higher competition for the customers’ attention. This might lead to stronger customer-relationship for TPPs.

Open banking will in the nearest future introduce a new financial value chain that allows new actors to hamper with the value chain. The Euro Banking Association states that there are four potential roles in the financial value chain: integrator, producer, distributor and platform (Euro Banking Association, 2016). Which role to choose depends on the service provided and desired position in the market. Figure 6 illustrates and describes each role in the financial value chain.

Figure 6 - The new financial value chain

NETS Third Party Open Producer Platform

Customer Customer

Distribution Distribution

APIAPI API APIAPI API

Products (Services, Functionality and Data) Products (Services, Functionality and Data) Distribution byThirdDistributionParties Integrator Distributor

Distribution Customer Customer

Distribution Distribution

APIAPI API APIAPI API Distribute yourselfDistribute

Products (Services, Functionality and Data) Products (Services, Functionality and Data)

Own product creation Product creation by Third Parties Closed Product

Source: Own production/ Euro Banking Association, 2016

Regulatory impact of PSD2 on Nets In our view, the most critical aspect for Nets in terms of PSD2 is the shaking up of payment industries and European banking as the legislation opens up for third-party access to customers’ bank accounts. The management informed in 2016 that the company will deliver tangible propositions in order to help their customers such as banks, merchants and corporates to ensure compliance with this part of legislation. This will be done through the company’s cross-sectional program. Moreover, Nets’ service offerings aim to help the banking sector to fulfill the complex requirements, and most importantly, securely handle payment request from

TPPs. (Nets, 2017, p.29). Based on this, it seems like Nets is planning to take the role as either the producer or the platform in the new financial value chain illustrated in Figure 6 above. The question is thus whether Nets is moving towards an open or closed position in the emerging account-to-account ecosystem.

Taking into account that third parties most likely will create new products like for example innovative applications for online payments, while banks continues to handle the distribution of bank accounts and card schemes to their customers as well as hoping to become a third-party provider themselves, we believe Nets will try to become the partner of choice for third-party providers. Hence, taking the role as platform in the new financial value chain is expected of Nets, ref. Figure 6 above. In sum, the question whether PSD2 is an opportunity or a threat is of high relevance when predicting Nets’ future, and will therefore be devoted a lot attention throughout our paper.

4. Peer Group

Nets has numerous competitors within each business segment. In the following we will introduce the European peers we characterize as the closest in terms of similar characteristics and business profiles. The payment value chain will be briefly discussed, followed by an introduction of what we consider as the European key peer group.

The payment value chain

Figure 7 - Payment value chain

Source: Own production/ DNB Markets, 2017, p.74

As mentioned earlier, the payment industry is a relative complex industry. It consists of several players that are active in different parts of the money transfer process which occurs between individuals, firms, banks, merchants, and organizations. With actors such as providers of payment services, merchant acquirers, card issuers, as well as card scheme operators and processors, the payment value chain is shown in Figure 7 above.

Each part of the value chain has different activities that can vary significantly, and thus mainly its own set of competitors. There are only a minority of competitors competing in several parts of the payment value chain. Thus, Nets is well-positioned, considering that the firm is the one of only few active across the entire value chain. Hence, Nets is capable of offering an “all-in-one” solution to its customer. (Nordea Markets, 2016, p.19)

No direct peers Due to the fact that Nets has numerous competitors which mainly focus on one part of the payment value chain, there are no listed direct peers who matches Nets unique appearance in all three business segments. However, there are a few listed peers that are present in some of Nets’ key business segments. Therefore, we believe that the companies that are closest to Nets are the ones that operates in a larger part of the value chain (e.g. most similar earnings profiles when it comes to diversification). The firm’s key peers in Europe are first and foremost Worldline and Worldpay, which in our opinion has most similar business profiles. Moreover, Wirecard and Paysafe are also key competitors, as they are exposed in multiple parts of the payment value chain. All four key peers mentioned above are European listed payment related companies. According to Damodaran (2017c), these companies, in addition to Nets, operates within the “Information Services” industry in Europe.

Key European peers Worldline S.A. Worldline, a France-based company, is one of Europe's largest provider of electronic payment services (measured in revenue). The company offers a broad range of products and services related to payments, and is active through a large part of the payment value chain, including merchant services and terminals, issuing processing services, online payment gateway, in addition to several other payments related services. Worldline is listed on the Euronext Paris market. (Worldline, 2017a).

We consider Wordline as the closest peer to Nets when speaking of its broad scope of payment services. The company provides a somewhat similar scope of services as Nets, where it is mainly present in two of Nets’ business segments. The acquiring segment of Worldline is comparable with Nets’ MS business segment. In addition, Worldline’s division “Financial Processing & Software Licensing” is comparable with Nets’ FNS business segment. (Barclays Capital Inc.,2016, p.9). On the other hand, Worldline’s diversification among numerous European countries differs from Nets’ dominant position in the Nordics. (Worldline, 2017c and Worldline, 2017a).

Worldpay Worldpay, a UK-based company, is characterized as a worldwide leader within the payment processing technology and merchant services, with a main focus on the UK. By operating a strong technology platform, Worldpay allows merchants anywhere in the world to accept a large number of payment types across multiple channels. (Worldpay, 2017). The company is listed in London and is a member of the FTSE 100 Index (Worldpay Group Plc.,2017). When compared to Nets, Worldpay has a strong presence in terms of offline acquiring. However, the UK-based company generates a greater portion of its revenues from online payments, but is not as active when it comes to the issuing processing or the debit networks part. (Worldpay Group Plc., 2017 and Deutsche Bank Markets Research, 2016, p. 5).

Wirecard A.G. Wirecard is a German multinational company, and is listed on Frankfurt Securities Exchange (TecDAX). The company is one of the world’s leading companies in terms of electronic payments. Moreover, it provides risk management as well as credit card issuing and sales for both online and terminal payments, in addition to offering processing of payments transactions. Wirecard offers various products and services that are related to customer service as well. (Wirecard, 2017b). The company can be divided into three main business segments: the “Payment Processing and Risk Management” segment, the “Acquiring and Issuing” segment, and the “Call Center and Communications Services” segment. (Wirecard, 2017a). The first two business segments have much in common with Nets’ business segments MS and FNS.

Paysafe Group PLC Paysafe is an online payment company from the UK, listed on London Stock Exchange and is a member of the FTSE 250 Index. The company offers digital payments as well as transaction-related solutions to numerous businesses and consumers worldwide. The firm’s main business divisions are “Payment processing”, “Digital wallets”, and “Prepaid solutions”. Moreover, the company provides card issuing as well as acquiring products and services (Paysafe Group Plc., 2017), and thus competes mainly with Nets’ MS business segment.

In sum, Table 7 highlights business areas where the aforementioned key competitors compete against Nets. Regarding other peers, Nets has numerous peers within each business segment, but due to lack of similarities in business models, they are only included in our multiple analysis in section 11.3.

Table 7 - Key European competitors

Merchant Services Financial & Network Services Corporate Services Key competitors Acquiring e-Com Network Issuing Processing e-Bill payments Digital ID Nets ✓✓✓ ✓ ✓ ✓ Worldline ✓✓ ✓ ✓ Worldpay ✓ ✓ Wirecard ✓✓ ✓ Paysafe ✓ ✓ Source: Own production/ Worldline, 2017a/ Worldpay Group Plc., 2017/ Wirecard, 2017a and 2017b/ Paysafe Group Plc., 2017

5. Theoretical Framework

In the following section, we will examine several theoretical perspectives used in the paper.

5.1 Strategic Analysis The strategic analysis in this section helps to identify the factors that influences Nets’ key value drivers, which is fundamental when forecasting future earnings.

5.1.1 Porter's Five Forces

To understand which industry factors and risks influence the firm's margins, we use the five forces analysis approach, developed by Michael Porter in 1998. By doing so, we will better understand the competition in the payment industry. However, it is crucial to know that a change in one of the forces could lead to a change in another as well, thus implying the importance of considering this analysis as dynamic (Hd Uddannelse, 2013). In the following we will briefly describe each force in the five forces analysis. An illustration of the model can be found in Appendix 4.

By analysing potential entrants in the industry, we aim to better understand the threat of new players and their possibility of gaining market shares that might result in negative returns for Nets. However, several barriers to entry might decrease the threat from entrants. Typical barriers are capital requirements, economies of scale, switching costs and government policy. Furthermore, rivalry among existing competitors will provide an

21 understanding of the level and type of competition Nets is facing in the industry. If pressure and chances to improve market position are present, there is a high possibility that competition or rivalry will occur. (Petersen et al., 2017)

The level of threat from substituting products will provide a better understanding of the impact substituting products have on Nets potential returns. If substitutes can improve the price-performance relation compared to existing products or the substituting products are produced by industries receiving higher returns, the threat will increase. In addition, by analysing the bargaining power of buyers, the vision of the strength between Nets’ buyers and the industry they operate in will be clearer. (Petersen et al., 2017). Bargaining power tends to rise if for example switching costs are defined as low. This will typically limit potential returns for Nets.

Finally, bargaining power of suppliers highlights the strength of suppliers relative to the industry. If suppliers have high power, they could raise prices or lower the quality of the product or service to obtain higher profitability. Factors such as high switching costs, more concentrated suppliers compared to the industry and the importance of the product or service to the industry will impact the bargaining power of suppliers. (Petersen et al., 2017).

5.1.2 PEST Analysis

The PEST analysis aims to identify macro factors affecting Nets’ cash flow potential and risk. The analysis indicates the impact of political, economic, social and technical factors. We have chosen not to use the extended model, PESTLE, because we do not consider the environmental conditions as a major factor. The legal issues will be examined in conjunction with the political situation. By identifying these factors, we will get a better understanding of which factors influences Nets environment. (Petersen & Plenborg, 2012, p.188, and Pest Analysis, n.d.) - What are the Political situations in the countries where Nets operate in that are likely to affect the firm and the industry? These factors address how the government policies may affect the economy and/or the industry. What are the legislations that regulate the industry that Nets operates in? Can/will it be any change in the future regarding legislations within the industry? - Which Economic factors will affect Nets? Economic structures and policies are factors that impacts the company.

- What are the Sociocultural aspects that are likely to affect the company? Several factors that might affect the demand of the company's products and services are for example population demographics and lifestyle changes. - What Technological changes have an impact on the company? These factors examine factors such as the speed of new technology and how this speed may affect the company’s ability to follow the technological development.

5.1.3 VRIO

The VRIO analysis aims to identify the competitive advantages as well as internal competencies of a business. VRIO framework is based on four questions about the company’s resources or capabilities to examine its competitive potential. A resource can be valuable (V), rare (R), not imitable (I), and if supported by the organization (O), defined as a competitive advantage. Each resource can be analyzed by answering the following four questions (Barney & Hesterly, 2008): 1. Value - Does Nets’ resources enable them to exploit environmental opportunities and/or neutralize external threats? 2. Rarity - Are Nets’ resources only controlled by a small number of competitors? 3. Imitability - Do the firms, without the recourses Nets currently have, experience a cost disadvantage when it comes to obtain or develop those resources? 4. Organization - Are Nets’ other policies/procedures organized such that they take advantage of its valuable, rare, expensive-to-imitate resources?

5.1.4 SWOT

To summarize the external and internal strategic analysis, a SWOT analysis is useful to identify Nets’ key issues and strategic drivers, as well as our findings from the financial analysis (which will be discussed in the next section). The goal of the SWOT analysis is to tie both analyses together to investigate the net impact of the strategic and financial factors that influences the future key value drivers. (Petersen & Plenborg, 2012). By doing this, we will get a better understanding of Nets’ position in the market, and what opportunities and challenges the firm experiences, at both the corporate and the business unit level.

5.2 Financial Analysis

5.2.1 The Reformulated Income Statement and Balance Sheet

In order to obtain a better knowledge about the driving force behind the company’s value creation we will make a distinction between operating and financial items in the firm’s reformulated income statement and reformulated balance sheet. By doing so, we aim to highlight the source of value creation which will help us make better decisions when forecasting future cash flow. (Petersen & Plenborg, 2012, p.68).

While reorganizing every activity in the income statement it is of high importance to match the same element in the balance sheet with the associated accounting item in the income statement (Petersen & Plenborg, 2012, p.91). Moreover, Petersen and Plenborg (2012, p.92) underlines that the characteristics of invested capital in terms of time period and comparison between firms, should be consistent.

5.2.2 Profitability Analysis

Performing a profitability analysis is essential when revealing components behind the firm’s trend and level of key drivers. In order to get better knowledge regarding which parts of the company’s operating business have the greatest impact on the firm’s overall performance, we will structure our profitability analysis based upon the most relevant components for our company in the Du Pont model. By doing so, we aim to construct a fundamental view of the firm’s accomplished performance. (Koller et al., 2010, p.165)

Nets’ operating performance is best analyzed through the company's return on invested capital (ROIC) as this measurement shows the overall profitability of the firm. However, whether the firm’s performance is connected to better capital utilization or the relation between revenue and expense cannot be explained by only analyzing the return on invested capital. Because of this, we will also try to get a deeper understanding of the firm’s source of value creation in terms of computing the profit margin and turnover rate on invested capital. (Petersen & Plenborg, 2012, p.107). Moreover, ROIC will be compared to WACC during the historical period to obtain a better illustration of value creation for stakeholders as well.

Regarding owner’s return on their investments, we will look at Return on Equity (ROE) as this measurement considers both operating and financial leverage. By analyzing additional factors such as the company’s net

24 borrowing cost (NBC), Spread and Financial Gearing, we aim to highlight the effect of financial leverage on owner’s value of investments. (Petersen & Plenborg, 2012, p.117-118).

Furthermore, by examining the relative performance of key ratios such as EBITDA margin before and after special items as well as EBIT margin, we hope to identify the company’s advantages and disadvantages in order to better understand Nets’ position in the Nordic payment industry. Working capital ratios for the company during the historical period will also be analyzed to obtain a clearer view of the historical improvements and thus be valuable for further predictions.

With this analysis and deeper understanding, we will be better equipped to make reasonable assumptions when creating our forecasts of the company’s future cash flow. See Appendix 7 for formulas used in aforementioned calculations.

5.2.3 Liquidity Analysis

Lack of liquidity in a company implies that the firm has no ability to pay its bills nor can it undertake any investments and exploit future business opportunities. Moreover, the chances for bankruptcy could potentially be high. By analyzing the company’s both short- and long-term liquidity risk we are better rigged to discover their ability to pay obligations before due time, but also the financial health of the company looking at a longer period of time in order to satisfy agreements in the future. (Petersen & Plenborg, 2012, p.150).

When determining the short-term liquidity risk, a good indicator could be to estimate the firm’s liquidity cycle in order to reveal the amount of days Nets uses to convert working capital into cash. Furthermore, current ratio is an alternative measure, and emphasizes the likelihood that current liabilities can be covered by sale of current assets. In terms of the firm’s long-term liquidity risk, financial ratios (e.g. financial gearing) has been estimated in the profitability analysis explained above. (Petersen & Plenborg, 2012, p.153-155). Formulas used in the calculations can be found in Appendix 7.

Yet, it is important to mention some shortcomings related to the liquidity risk due to the fact that the analysis only describes a portion of the firm’s liquidity situation. Factors that are not included in the financial ratios such as operating expenses and income, as well as capital expenditures, will present a possible weakness for the liquidity analysis. This needs to be taken into consideration when forecasting and designing future cash flow.

Furthermore, these measurements are also dependent on historical accounting information, thus representing a backward looking. (Petersen & Plenborg, 2012, p.155 and 165)

5.2.4 Indexing and Common-size Analysis

By analyzing the profit margin and turnover rate of invested capital in the profitability analysis, it will be helpful in order to explain if the revenue/expenses relation and the capital utilization efficiency have either improved or deteriorated over time. However, the analyzes of these ratios are often very vague when it comes to how they have evolved during time. To be able to understand the evolution of the revenue/expenses relation as well as the capital utilization efficiency, it is useful to decompose the two ratios by performing a common-size analysis and indexing (trend analysis). (Petersen & Plenborg, 2012). These two analysis is done for both the income statement and the balance sheet. From an analytical point of view, the most optimal would be to compare these values with comparable peers. However, due to lack of direct competitors, comparison is less suitable.

The trend analysis of the income statement is done to discover trends in the company’s revenues and operating expenses, with 2012 as a base year. However, index numbers do not illustrate the relative size of each accounting item, and thus common size analysis is a useful tool. The common-size analysis of the income statement is also implemented on the basis of revenues and operating expenses, and scales each accounting item as a percentage of net revenues (2012 as a base year). Both trend and common-size analysis are done in terms of invested capital as well, in order to better understand the development in capital utilization. According to Petersen and Plenborg (2012), a disadvantage of using trend analysis when analyzing the invested capital is that the importance of each accounting item is no longer obvious.

5.2.5 Forecasting

In order to reflect the company’s expected performance, we will design a forecasting system which will be used to implement both the strategic and financial value drivers of the company. The strategic value drivers are specific for the type of industry and firm analyzed, while financial value drivers represent the underlying performance presented as a financial ratio or number illustrating the company’s value creation. The financial value drivers are often derived from the firm’s strategic initiatives in relation to the desire of boosting the company’s value with operational activities. (Petersen & Plenborg, 2012, p.175).

Diverse designs of pro forma statements are accessible, however, in this thesis the sales-driven forecasting approach is applied because it provides a good connection between the company’s activity and associated costs and investments (Petersen & Plenborg, 2012, p.175).

Koller et al. (2010) points out that a decent length of the detailed forecast is 5-7 years including as many as possible connections to real variables in the balance and income statements. Moreover, for the remaining years, a less advanced forecast is preferred in order to simplify the model, but also to avoid flaws from misleading precision. The forecast period will thus reflect a steady state environment assuming everything remains constant, and can therefore be valued based on a growth perpetuity.

The forecasting process will contribute with important information that can further be used to calculate the firm’s net operating profit after taxes (NOPAT), invested capital as well as return on invested capital (ROIC), in addition to the free cash flow (Koller et al., 2010, p.187). However, it is crucial that the estimates included in the pro forma statements represents an achievable value for the firm. By comparing current and past performance with the expected achievements, the estimated key value drivers can be evaluated. Moreover, to obtain a better understanding of how the adjustments of the firm’s key financial value drivers influences financial measures such as ROIC and free cash flow, Petersen and Plenborg (2012, p.195 and 198) highlights the importance of conducting a sensitivity analysis as well as evolve a scenario analysis.

5.3 Cost of Capital In order to value Nets, it is crucial to determine investors’ opportunity cost related to their choice of investment as they will expect to earn some payoff for the risk they take when choosing one particular fund instead of another. The weighted average cost of capital (WACC) is good to use when evaluating these costs, however, consistency among elements in the formula for WACC, including equity and net interest-bearing debt (NIBD), must meet some important criteria. (Koller et al., 2010, p.235).

Koller et al. (2010) argues that opportunity costs such as debt, equity etc. must be included, and it should be weighted against its target market-based value, not historical book values. Moreover, to fit the same criteria as for the calculation of free cash flow, computations must be based on after-tax terms. Another important issue that needs to be considered are the geographical areas Nets generates its revenue and debt from, meaning that

27 several currencies with different local corporate taxes will need further examination. Taking these criteria into account, the weighted average cost of capital is determined by the equation below:

Equation 1 - Weighted Average Cost of Capital

Source: Koller et al., 2010, p.265

In this section, we will elaborate on the theory and methodology used to estimate the components of WACC.

5.3.1 Cost of Debt

The required rate of return on debt is calculated by adding default spread to the risk-free rate, as well as adjusting for any tax benefits that are generated by the interest expenses. (Damodaran, n.d.,b).

Equation 2 - Cost of Debt

Source: Petersen & Plenborg, 2012, p. 265

The cost of debt is dependent on three different aspects: the default spread, the corporate tax rate and the risk- free rate. First, Professor Damodaran (2017b) argues that if a firm is rated, the credit rating in addition to a typical default spread on bonds with the same rating, should be applied in order to estimate the cost of debt. He claims that actual ratings are more precise than synthetic ratings, as synthetic ratings may only be based upon the interest coverage ratio, in contrast to actual ratings that incorporates all of the other ratios as well as qualitative factors. Hence, credit ratings done by rating agencies should be used if available. Since Nets has a rating of Ba2 from Moody’s, this rating can be used in order to determine the default spread (Moody’s, 2017).

Second, the estimation of cost of debt is also dependent on which tax rate to incorporate. In the annual report from 2016, Nets informed that enacted tax rates and tax laws in the countries where the firm operates in, are the once that are used (Nets, 2017, p.95). It may be argued that the company’s own effective tax rate can be used as Nets has made adjustments and calculated an average in relation to its various corporate tax rates.

However, as this is most certainly based on several assumptions done by the firm itself, we will calculate a blended global tax rate build upon the group’s net revenue per geographical area and the respective local corporate tax rates. With this approach, we believe that we will obtain the most accurate blended global tax rate as revenues generated from each location in the Nordics will give a better picture of the weighted amount relative to the firm’s total net revenue. Hence, a more accurate estimate is achieved when taking the respective local corporate tax rates into account. With this blended global tax rate, we aim to obtain low volatility, nor is it biased in further analysis.

Risk-free rate The last issue regarding estimation of cost of debt is the risk-free rate, which is an indicator of how much an investor can earn without acquire any risk (Petersen & Plenborg, 2012, p.249). However, risk-free rates are not necessarily exactly risk-free. To estimate a rate as close as possible to risk-free, Koller et al. (2010, p.241) argues that for a European company, 10-year German Eurobond should be used as a proxy when estimating the risk- free rate. This is due to higher liquidity in German bonds and less credit risk compared to bonds of other countries in Europe.

Petersen and Plenborg (2012, p.251) points out that issues regarding inflation when estimating the risk-free rate should be avoided, which can be bypassed if using government bond denominated in the same currency as the firm’s cash flow. However, on the grounds that we are using MSCI Europe Price Index when analyzing the markets historical returns, which is further elaborated in section 10.2, and the fact that Denmark has been a Europe member country since January 1st 1973 (European Union, 2017), we believe it is reasonable to gather rates from the 10-year German Eurobond when estimating the risk-free rate. Additionally, due to the “fixed rate policy” Denmark has against the euro (i.e. the Danish krone is “pegged” closely to the euro), the euro-based exposure is considered low, which supports this argument (Nets, 2017, p.71).

5.3.2 Cost of Equity

According to Petersen et al. (2017), investors required rate of return can be derived from the Capital Asset Pricing Model (CAPM). The equation below illustrates the equilibrium between the firm’s and the market portfolio’s risk premium, which highlights the fact that investors are only willing to pay for the risk they are not able to diversify away in their broad portfolio of shares. Hence, only the sensitivity of the stock against the market is priced. (Petersen et al., 2017, p.345).

Equation 3 - Cost of Equity

Source: Petersen et al., 2017, p. 345

Market risk premium The market portfolio’s risk premium (MRP) is computed as the difference between returns on risk-free investments () and market returns (). There are two common ways to calculate the risk premium: the ex- post approach and the ex-ante approach. (Petersen & Plenborg, 2012, p.263).

In this paper, ex-post approach is adopted, which is based on the difference between the historical returns on both the stock return and the risk-free investments. This method has in general several pitfalls regarding the estimation of MRP. First, the time period used when estimating MRP is important, as it is sensitive to “survivorship bias”. (Petersen & Plenborg, 2012, p.263). Koller et al. (2010) argues that historical trends in the market should be taken into account when determining the time period. Hence, by using a time period of 20 years (i.e. two economic cycles), it is reasonable that the most crucial trends should be smoothed out. Furthermore, the question whether using arithmetic or geometric average will lead to different values. Koller et al. (2010, p.243) suggest that an arithmetic average of longer-dated intervals should be incorporated

Systematic risk on equity - Levered Beta

In order to understand how much the stock and entire market move together, we need to estimate the value of beta. According to Koller et al. (2010), there are several important guidelines that needs to be considered when making sure that the measurement of beta is precise. Raw beta can be obtained by using regressions. However, to avoid systematic biases it is important that the measurement period includes at least 60 data points plotted over a period of five years with monthly returns. Due to the fact that Nets was listed in September 2016, we will not use a regression beta derived from Nets. Koller et al. (2010) states that raw betas can be measured from close peers’ stock returns. Similar competitors that compete with the firm in several categories within the same industry and with a significant market cap is used. Furthermore, the stock returns should be regressed against a market portfolio that is value-weighted and well-diversified, such as MSCI Europe and MSCI World Index. Moreover, rolling betas should be graphed in order to clarify any patterns and/or systematic changes in a stock’s risk. (Koller et al., 2010, p.250).

By adjusting for differences in financial leverage between Nets and its peers, raw betas are unlevered for each comparable firm (Petersen et al., 2017, p.351). Taking into consideration that debt claims are prioritized first, we assume that beta of debt equals zero (Koller et al., 2010, p.255). Hence, unlevered beta is calculated by rearranging Professor Damodaran’s (n.d.,a, pp.63-92) conventional approach:

Equation 4 - Levered beta

Source: Damodaran, n.d.,a

β represents each firm’s raw beta, while β is the unlevered beta. As proxy for the comparable firms’ target capital structure, we have used each firm’s capital structure as of December 31st 2016.

Dividing raw betas by the firm’s respective local corporate taxes and capital structure, we obtain unlevered betas for each company. The average of unlevered betas for Nets’ peers gives us a measurement of the industry's operating risk. Finally, Nets’ systematic risk is estimated by adding the firm’s financial risk to the average unlevered beta. Hence, we lever the unlevered beta with Nets’ target capital structure by Equation 4 above.

Koller et al. (2010, p.257) suggests that, in order to reduce beta estimation error, the calculated beta can be improved through Bloomberg’s simple smoothing process. With the equation illustrated below, we aim to lower extreme observations by smoothing our raw regression towards 1:

Equation 5 - Adjusted beta

Source: Koller et al., 2010, p.257

5.3.3 Capital Structure

The capital structure should be based on market values if available. In addition, a company’s capital structure should be built upon target weights on a market basis instead of current weights, due to the fact that a firm’s

31 present capital structure might not represent the expected level to prevail during a business’ lifetime. (Koller et al., 2010, p.266).

Furthermore, using current capital structure may lead to an overestimation (or underestimation) regarding the value of tax shield, if the company is planning to drop (or rise) its leverage (Koller et al., 2010, p.266). Hence, a target capital structure is used to avoid that the current capital structure only reflects a temporary condition. Petersen and Plenborg (2012) further argues that a company’s long term capital structure should be used when estimating WACC.

5.4 Valuation The valuation of Nets will be based on the forecasts in section 0. From beginning to end, we have done our best to find the most rightful estimates for the required input factors in our valuation, in addition to do our best to be objective throughout the paper. Nevertheless, based on the fact that the future is never absolutely clear, we will perform a sensitivity and scenario analysis as the final step.

A sensitivity analysis will help us better understand the valuation consequences when adjusting some of the company’s key value drivers, and thus more properly evaluate the robustness of our value estimate. Therefore, it is of great importance to accompany our valuation with a sensitivity analysis inspired by our fundamental analysis which was also used to design pro forma statements. (Petersen & Plenborg, 2012, p.241). This approach will contribute with achieving a more bound valuation range.

Additionally, we will perform scenario analysis as some of our estimates might rely on assumptions that could change the value of Nets significantly. Factors identifying the firm’s strategic value drivers will be used to further evolve scenarios (Petersen & Plenborg, 2012, p.198). By doing so, we aim to set our valuation model in perspective and obtain an even stronger understanding of Nets’ key priorities.

5.4.1 Discounted Cash Flow (DCF) model

The DCF model is a present value approach that is widely used by analysts and researchers. The model can be separated into two methods: enterprise value approach and equity approach. (Petersen & Plenborg, 2012,

32 p.216). In our valuation of Nets, we have chosen the enterprise value approach. According to Koller et al. (2010), the enterprise discounted cash flow model works well for companies that manage their capital structure towards a target structure, which is relevant in our case. The DCF model relies on the fact that firm value is determined by the present value of expected free cash flows. To calculate Nets free cash flow to the firm (FCFF), we apply this formula:

Equation 6 - Free Cash Flow to Firm & Capital Expenditures

Source: Petersen & Plenborg, 2012 and compiled by authors

The model further reflects that only FCFF and WACC affects the market value of a firm, implying that the enterprise value (EV) is affected positively by higher FCFF’s and lower WACC (Petersen & Plenborg, 2012, p.216). EV is calculated by this formula:

Equation 7 - Enterprise value

Source: Petersen & Plenborg, 2012

The formula above is specified as a two-stage model, meaning that the first part of the equation calculates EV for the forecasting horizon, while the second part calculates the terminal value, where g represents the terminal growth rate in the terminal period (Petersen & Plenborg, 2012, p.216). Next step is to deduct the value of NIBD from the estimated EV to get the market value of equity. Petersen and Plenborg (2012) points out that the market value of debt should be used when estimating EV, however, book value of NIBD is a good proxy if market value is not available or could be inadequate. In order to calculate estimated price per share, the total market value of equity is divided by the number of shares outstanding.

5.4.2 The Relative Valuation Approach

In order to reality check the results from our developed discounted cash flow, we will implement a relative valuation to a broad peer group, consisting of peers across the entire payment value chain. The peer group is

33 chosen by collecting peers stated by both Nets and a large group of investment bank analysts. The relative valuation approach use models often introduced as multiples which are related to the price of comparable firms. Thus, with respect to multiples derived from comparable firms which is based on current market values, the company’s value is estimated. (Petersen & Plenborg, 2012, p.6).

The comparison between the firm and its peer group, leads to significant constraints on data that needs to be taken into consideration when implementing the multiples. First, regarding the companies being compared, it is vital that the accounting policies are identical. Second, the firm’s earnings need to hold the same “quality”, meaning that non-recurring and recurring earnings are separated for both the company and its peers. Last, but not least, the application of multiples has to be based on same expectations regarding the comparable firms’ future in terms of risk, growth and profitability. (Petersen & Plenborg, 2012, p.227)

The key to a successful relative valuation approach is to use the correct multiples. By using this technique, we have collected several multiples from Bloomberg based on their advantages and disadvantages which is summarized in the table below.

Table 8 - Advantages and Disadvantages of Multiples

Source: Own production, Petersen & Plenborg, 2012, p.241-244 and p.400-404, Koller et al., 2010, p.313-333.

6. Strategic Analysis

6.1 Porter’s Five Forces The Nordic countries are defined as very advanced regions when it comes to the technological adoption of digital payments. In most segments in the industry, Nets is the leading player across the value chain. Moreover, Nets experience strong competition on the European market as well, where some firms compete with Nets in several parts of the payment value chain. However, the expectations of innovation in business models and technology in the industry is quite high as it continuously comes new emerging players in the market. Thus, disruptive

35 technologies, substitutes, and competitors within the industry may be a threat to Nets in the medium-to-long term. (Computerworld from ISD, 2015)

6.1.1 Threats of Potential Entrants

Nets has a strong position in the market, however, PSD2 will open for innovation and several new players, e.g. TPPs. In the following, these effects will be examined.

Threats of potential entrants in the MS segment In Denmark, Nets acts like an overall acquirer meaning that it offers both domestic card scheme (Dankort) and international card scheme (Visa/MasterCard), which is attractive for merchants as they tend to choose an all-in- one solution. However, new entrants that previously only offered international card scheme, could potentially also offer domestic card scheme. This will result in higher competition as merchants have more alternatives to choose from, implying that Nets’ MS segment might be facing high threat from new entrants. On the other hand, Nets is already strong positioned in the market, and switching costs for merchants is present to some extent. This will lower the potential threat from new entrants. Nevertheless, it might be hard for new entrants like PISPs to position themselves in the market as issuers of international card schemes due to lower transaction fees at domestic card schemes (DNB Markets, 2017, p.30). This supports the decrease in threats from new entrants.

Threats of potential entrants in the FNS segment The regulation opens for merchants to set up either international or domestic card payments as default. However, the consumer will be able to choose which card payment he/she wants to use. This could lead to higher revenues for Nets’ FNS segment as international card scheme have higher transaction fees compared to domestic card scheme. Despite that, it will also open for more competition between international card schemes, thus threaten Nets’ position as issuer of international card payment. Another important factor to consider is the merchant's choice of card payment as default which could impact the consumer's choice of card payment at point-of-sale (POS). The consumer could potentially not bother to manually change the brand at POS terminal. Hence, the FNS segment is facing a medium threat from new entrants.

Change in requirements for the interchange fee implies that the owner of a card scheme and the processor of a transaction must be separated in two different units. As the market gets more open, we believe this will lead to higher competition regarding transaction processing, thus increasing the threat from new entrants. This will

36 affect Nets in Denmark as they are both owner and processor of the domestic card scheme. Furthermore, as PSD2 opens for access to payment systems, it will put pressure on card payments. The increased use of account- based payments in retail transactions represents a high threat of entrants in Nets’ FNS business unit.

Threats of potential entrants in the CS segment Regarding Nets’ CS segment, resources and experience in the market is crucial. Due to PSD2, digital identification solutions have had an increased focus on security. Thus, new entrants might have a hard time settling down. However, the electronic invoice and recurrent payments may experience increased competition as the usage of account-to-account payments are expected to rise. As elaborated in section 3.1, AISPs and PISPs will emerge, and thus threaten the CS segment at Nets. However, Nets is well positioned when it comes to account-to-account payments, as the company is already prepared to act as AISP and PISP itself. In our belief, new entrants that wants to become a PISP will most likely need to fulfil strict requirements and have a lot of resources to enter the market. Therefore, we consider threats from these entrants as medium.

In sum, as large investment and scale are necessary to be competitive, Nets’ strong positioning regarding its established digital payments infrastructure, scale and long track-record, gives the company a unique competitive advantage. The threat of potential new entrants is therefore considered as low in well-established POS payment ecosystems, but medium in business models with newer digital technology like e-commerce, peer-2-peer and mobile payments. This will be considered in the forecasting section.

6.1.2 Buyers Bargaining Power

The bargaining power of buyers is a strong force that impacts the industry competition because it is the most significant driver of digital business, and arises from needs and expectations of the customers (merchants) and consumers (shoppers). Consumers are in a much better position than before mainly because they have instant access to information, such as through social media. It is also common with low switching costs via digital channels, and substitute services as well as products that is easier to use and more convenient. (Computerworld from ISD, 2015)

Buyers bargaining power in the MS segment In the MS business unit, switching costs are quite low, as it is easy for merchants to choose an easier and cheaper provider in the market, leading to a higher power of buyers. Furthermore, due to increased activity in account-

37 to-account payments, consumers have now more options to choose between when conducting a payment. Thus, we might see a decrease in payment terminal transactions, but then followed by an increase in digital payments like contactless cards and mobile payments. (Nets, 2017, p.29). It is reasonable to believe that the merchant acquirers’ adaption to the market demand will increase the buyer's bargaining power.

Buyers bargaining power in the FNS segment Customers of the FNS business unit is primarily the banks. Nets is the owner, only acquirer and operator of Dankort in Denmark. Dankort is also the most used and cheapest payment method in Denmark. (DNB Markets, 2017, p.26). This implies that the bargaining power of buyers is low. Additionally, DNB Markets (2017) points out that settlement of domestic card scheme is immediate, which could lead to high switching costs for buyers, and thus support the argument of lower power. Regarding Norway, Nets provides the infrastructure platform and acts like the operator of BankAxept (Nets, 2017, p.22). This card scheme is highly attractive to Norwegian merchants as well as for same reasons as mentioned above. In addition, BankAxept is widely used by consumers in Norway, hence we believe bank's bargaining power is assumed to be low. However, Nets is not the owner of BankAxept as it is acquired by the Norwegian banks, which could lead to an increase in bank's bargaining power from low to medium.

Buyers bargaining power in the CS segment Finally, in the CS segment, the customers are the corporates, banks and governments. Nets is the market leader as the company is the only player who offers electronic invoice- and digital identification solutions in Denmark and Norway (Nets, 2017, p.68). Hence, governments, banks and corporates will currently not have other solutions to choose between. If banks try to integrate an alternative login system, it will be both expensive and time consuming, hence the switching costs are high (Morgan Stanley, 2016). Therefore, it is reasonable to assume that buyers bargaining power is low. In addition, Nets handles the National Clearing systems in Denmark and Norway, which also supports this argument.

Based on the aforementioned arguments within Nets business segments, bargaining power of buyers is considered as medium, which will be further discussed in our forecasts.

6.1.3 Suppliers Bargaining Power

Suppliers with bargaining power over the participants may have the ability to either accelerate or slow down the digital based business model’s adoption, depending on how the situation impacts the supplier’s own situation. (Computerworld from ISD, 2015). In terms of Nets’ key suppliers, they can be divided into two categories: the payment terminal suppliers at POS like Verifone, and suppliers of several IT services (Nets, 2017). Due to the fact that Nets offers a broad range of services with a significant scale, it is reasonable to argue that Nets has influence over its suppliers.

This is further supported by the fact that Nets has successfully negotiated lower POS payment terminal sourcing costs from vendors over the past years. According to the firm’s annual reports from 2012 to 2016 regarding IT services suppliers, Nets’ has gradually invested in security, stability, IT platforms, innovation in terms of new products, while also reducing corresponding costs. Thus, despite a gain in IT-related investments, the company’s IT costs per transactions have decreased from 2014-2016, suggesting that Nets gets good prices from external IT services providers (Nets.eu, 2017b). Based on these findings, the power of suppliers is considered low.

6.1.4 The Threat of Substitutes

Card payments & account-based payments The most used payment method in the Nordic countries are payment by cards, however, a potential substitute could be account-based payments delivered by mobile apps like MobilePay in Denmark and VIPPS in Norway. In addition, PSD2 will require banks to open up for TPPs. This could potentially lead to an even higher threat to card-based payments. On the other hand, through Nets’ CS business unit, the company is also considered as a main provider of account-to-account payments in both Denmark and Norway. This plays an important role for growth in the long-term.

Mobile payments Furthermore, disruptive technologies along with the emerging technologies, such as mobile payments, is considered as a potential substitute for both card and cash payments. Due to the fact that Nets already have developed technologies and channels for new trends emerging, the threat in this case will be related to Nets’ ability to gain market share to same extend as it has with POS terminals. New players that offers technologies like peer-to-peer payments, e-commerce, and mobile payments will represent the mid-to-long term threat for

Nets. Nevertheless, the issuer payment processing which is handled in-house, especially in Sweden, could be a potential substitute to issuer payment processing offered by Nets to Nordic banks (UBS Limited, 2016, p.10).

In sum, threat of substitutes is considered as low in the short-term, but emerges to medium in the mid-to-long term. This will be valuable for further discussion in our forecast.

6.1.5 Competitive Rivalry Among Existing Firms

In regard to entry and exit barriers, digital disruption has further decreased the low-cost for digital business models. Physical assets and infrastructure is no longer required for competing in the front of service delivery. Platform operators have lately aimed to get closer to customers regardless of not having assets nor employees in the industry. (Computerworld from ISD, 2015). As mentioned before, Nets is known as a major player in the Nordic market with its broad portfolio, and competes with several players for diverse product categories. This will be elaborated in the following.

Competitive rivalry among existing firms in the MS segment In the MS business unit, the firm meets competition from both merchant acquirers acting like TPPs (e.g. Bambora), and acquiring banks that has all their operations in-house (e.g. Swedbank and Handelsbanken). Nets experiences competition from the merchant services market that is not directly related to acquiring as well, such as POS terminals (e.g. Verifone), online gateways and value-added services (e.g. PayEx).

Figure 8 - Nordic acquirers by total number of transactions acquired

Nordic acquirers by total number of transactions acquired (m), 2016 6000 5000 4000 3000 2000 1000 0 Nets Swedbank Handelsbanken Bambora

International card transactions Domestic card transactions

Source: Nets Annual Report 2016/ HSN Consultants Inc., 2016

The four largest acquirers in the Nordics are Nets, Swedbank Babs, Handelsbanken and Bambora, where Nets is the only provider of both domestic and international card scheme. When ignoring the transactions from domestic cards, Swedbank Babs had in 2015 more international transactions than Nets, as highlighted in Figure 8 above. Some of the competitors in the MS segment offers equally attractive products and services. However, Nets offers a much broader specter of services than its competitors, resulting in more power in the industry.

Competitive rivalry among existing firms in the FNS segment The FNS business unit meets competition from two sides. The domestic card scheme providing Dankort and BankAxept competes against alternative payments like the international card schemes VISA, MasterCard and American Express. In addition, FNS faces competition from account-to-account payments such as Paypal, and third party processors like Evry, and banks with in-house operations. As already mentioned, some firms offer card schemes which are processed in-house, while others, such as Evry, First Data and Worldline, offers production of payment cards and issuer processing for other banks. Moreover, competition from European companies has increased, e.g. Worldline, which has recently become very aggressive in the Nordic market.

The largest share of card transactions processed in the Nordics are still managed by banks themselves. When excluding domestic card schemes, 39% of card transactions in 2015 were handled by in-house processes, while Nets processed 37% (DNB Markets, 2017, p.25). Nevertheless, 24% were processed by third-party issuer processors which usually competes within card payment solutions in the market. Hence, we believe this segment might face high rivalry among existing competitors. To substantiate this argument, Figure 9 illustrates the amount of card transactions in the Nordics when both including and excluding BankAxept and Dankort:

Figure 9 - Share of card transactions incl. and excl. domestic card schemes

Share of card transactions processed in the Nordic 2015 Share of card transactions processed in the Nordic 2015 - including BankAxept and Dankort - excluding BankAxept and Dankort

Nets Other players In-house Nets Other players In-house

Source: Own production/ DNB Markets, 2017, p.71-72.

Competitive rivalry among existing firms in the CS segment The CS business unit competes in three segments: e-bill payments, clearing and settlement, and adjacent digital services. In Denmark and Norway, Nets has a leading position in the e-bill payments segment. At the same time, e-bill payments are dominated by local players in both Sweden and Finland. Furthermore, the competition in clearing and settlement segment is more or less the same as with e-bills, except that both interbank clearing and settlement (of transactions categorized as high-value), are performed by a company called BEC (a Danish IT infrastructure company). Nets could also experience competition from companies such as VocaLink (which is acquired by MasterCard). In terms of the adjacent digital services, Nets meets most of its competition from IT infrastructure companies. (DNB Markets, 2017, p.34-37)

Within invoicing, Bankgirot is the central player in Sweden, as well as clearing and settlement. Digital identification is delivered by the Swedish BankID in Sweden and TUPAS Identification Services in Finland. The Swedish BankID is owned by several Swedish banks and managed by “Finansiell ID-Teknik BID AB”. Regarding Finland, the Federation of Finnish Financial Services has designed TUPAS which is used by most of the major Finnish banks. (DNB Markets, 2017)

In sum, Nets faces competition from a handful of players in all three business segments. Even though the company is the only provider of the entire value chain, which obviously strengthens its position in the industry, we believe that players who offers similar products and services in multiple parts of the value chain increases the rivalry. Taking this into consideration, the competitive rivalry among existing firms is considered as high.

6.1.6 Summary Porter’s Five Forces

Table 9 - Summary Porter's Five Forces

Porter´s Five Forces Low Medium High Threat of new entrants x x Buyers bargaining power x Suppliers bargaining power x Threat of substitutes x x Competitive rivalry x Source: Own production

6.2 PEST analysis In the following section, we will analyze the most crucial macro factors that affect Nets’ cash flow and risk, as well as the industry it operates in. Due to the digital disruption and emerging digital technologies and thus changing business models, the current products and services offered in the payment industry might be affected.

6.2.1 Political Factors

Political situation As Nets is geographically exposed, the company is subject to several tax rates. Regarding Denmark’s corporate tax rate, The Danish Ministry of Taxation has already lowered the rate from 25% to 22% in the period from 2013 to 2015, and aims to keep the corporate tax at 22% in 2017 (Skatteministeriet, 2016). Taking a further look at the European countries, we see that seven EU-members will reduce their corporate tax rate during 2017. This applies to Britain, Italy, Croatia, Norway, Slovakia, Luxembourg and Hungary, where the latter almost decreases its corporate tax rate by 50% down to 10-11%. Moreover, the rest of the world is expected to follow, thus putting even more pressure on Denmark (Berlingske Business, 2017).

Lower corporate tax rate for Nets could potentially lead to a rise in the firm’s reinvestment and new technology in terms of production and equipment. Additionally, as the company’s operations are located on several geographical areas in the Northern as well as Baltics, changes in corporate tax rates might have a great impact on Nets’ decisions regarding further expansion and development.

Legislations within the industry As a provider of fundamental infrastructure and its handling with highly sensitive information, the payment industry is strongly regulated in order to protect consumers and merchants, especially from a competition and safety viewpoint. However, PSD2 is considered as having the most significant impact on the industry Nets is operating in. The primary change is related to banks opening up for third parties which will get access to account information and data on behalf of customers’ approval. Moreover, with license from home country, third parties will also be allowed to operate as providers of financial services in the entire Europe. This leads to higher attention regarding fraud prevention and stricter requirements for payment service providers in terms of security.

As banks are now obligated to hand over customers account information to TPPs, entry barriers are significantly. reduced. Furthermore, account based payments will most certainly increase, which leads to a rise in real time clearing volumes and higher possibility for a decline in card based payments. (Deutsche Bank Markets Research, 2016, p.58). However, based on the firm’s already existing relationships with banks and merchants, as well as corporates and regulators, not to mention its strength within real-time clearing, the firm has great potential in taking a leading position as both AISP and PISP.

Furthermore, international credit and debit card payments will as a result of the EU Interchange Fee Regulation have a cap for the interchange fee. For EU member countries, this regulation has been taken into account since December 2015. The market in Norway, on the other hand, implemented the regulation a year later, in September 2016. (DNB Markets, 2017, p.81). The interchange fee regulations give the consumers and merchants possibility to choose which type of card scheme the transaction will be routed through at POS. Moreover, the owner of the card scheme and processor of transactions can no longer be in the same unit, nor is cross- subsidizing between these groups allowed. Hence, they must be separated which will lead to a more open market. Regarding transaction processing, it is considered that the level of competition will increase. Nevertheless, the long-term impact of the cap for interchange fee could potentially lead to a decline in debit cards, thus lower the innovations for this product. (DNB Markets, 2017, p.33)

Last, but not least, the Payment Card Industry (PCI) Data Security Standards, was developed in order to avoid security issues such as breaches and viruses, thus preventing fraud in the payment systems. According to Nets Annual Report 2016, Nets has fulfilled all the required certifications within the PCI Data Security Standards. In addition, with an IT risk function, the company is assuring both reliability and stability by overseeing infrastructures at partners, but also within the firm’s own business units, to early detect potential incidents. This implies that the firm has already denoted heavily focus on security, reliability as well as stability. (Nets, 2017, p.29).

The increased threat from competition and urgent payment technology that PSD2 presents to the banking industry might lead to Nets winning the outsourcing business from banks, and further a rise in demand from the firm’s FNS unit. Additionally, Nets’ CS business unit have already developed technological position in terms of account-to-account transactions, thus it is ready for a potential challenge from new entrants. However, a

44 consequence of the separation of schemes could be share losses for Nets as it might potentially impact the firm’s Dankort business model.

Based on the aforementioned factors, there is no doubt that the purchasing and payment methods are growing in numbers, moreover boosting the complexity in the industry. In order to stay innovative and competitive in front-end solutions, the change in the nearest future, mostly due to PSD2, will expect from players that operations representing the center of the business are improved.

6.2.2 Economic Factors

Economic growth Nets business is mainly driven by a fee per transaction. By comparing the number of Dankort transactions with the economic growth, it has historically shown that Nets is resilient to low economic growth. As Figure 10 below illustrates, Dankort transactions have grown steadily from 2002-2015 despite the fact that the economic growth has fluctuated. Even during the financial crisis with negative economic growth, Nets generated reasonable profits with Dankort transaction volumes growing (Nets, 2014). Hence, Nets is resistant to change in economic volatility. Based on forecasted GDP numbers from “EU Information Centre”, the GDP growth in Denmark is expected to equal 1.5% and 1.8% in 2017 and 2018, respectively (EU-Oplysningen, 2016). Furthermore, the same trend appears to be present in Norway, as Figure 11 below illustrates, which suggests that Nets has been relatively unaffected by the economic cycle.

Figure 10 - Dankort transactions vs. GDP Figure 11 – BankAxept transactions vs. GPD

Dankort transactions (m) and change in Danish GDP BankAxept transactions (m) and change in Norwegian GDP

1600 5% 1600 5% 4% 1400 1400 4% 3% 1200 1200 2% 3% 1000 1% 1000 0% 2% 800 800 -1% 1% 600 -2% 600 0% 400 -3% 400 -4% 200 200 -1% -5% 0 -6% 0 -2%

Dankort transactions* YOY% change in Danish GDP BankAxept transactions YOY% change in Norwegian GDP * excl. transactions through mobile in 2015 Source: Own production/ Nets.eu, 2017a/ The World Bank, 2017a/ The World Bank, 2017b/ Norges Bank, 2014/ Norges Bank, 2016

Foreign exchange rates Figure 12 - Net revenue per geographical area Denmark and Norway are currently the largest markets for Nets. Therefore, the DKK/NOK exchange rate is of high relevance and have an impact on Nets financial results. The company is also exposed to other currencies, mainly from Sweden and Finland. Although Nets reports its financial results in DKK, its cash flows will also fluctuate with the exchange rates of NOK, EUR and SEK (when translated into DKK). As Figure 12 shows, Nets has more than 50% of revenues coming from Norway, Sweden and Finland, emphasizing that an increase (or decrease) of the average DKK/NOK and DKK/SEK exchange Source: Own production/ Nets Annual Report 2016 rates will have a significant effect on Nets financial results. However, the “de facto fixed-rate policy” Denmark has against the euro, results in less exposure in the DKK/EUR rate (Nets, 2017, p.71). For further sensitivity towards currency variations, see sensitivity analysis in section 11.4.4.

Interest rates Nets is mainly exposed to interest rate risk when it comes to loans, credits, and cash balances. The firm has most of its debt in EUR (47%), but also in DKK (32.3%), NOK (20%) and SEK (0.83%) (Nets, 2017). According to Nets Annual Report 2016, the interest rate on both the term loans in DKK and NOK are hedged. Hence, only the term loans in EUR and the revolving credit facility are exposed to change in interest rate. (Nets, 2017, p. 94). That said, change in interest rate could impact Nets’ balance sheet.

OECD (2017) forecasts long-term interest rate in the EURO-area for 2017 and 2018 to equal 0.6% both years. The interest rate is expected to increase in Denmark, Norway and Sweden from 2017 to 2018 by 0.1%, 0.2%, and 0.3%, respectively. The interest rate in Finland is expected to stay the same in 2017 and 2018 (0.2% annually). With this in mind, we do not expect any big fluctuations in the interest rate the next few years. This can also be reflected by looking at the historical interest rates the last five years for the countries mentioned in this section. (OECD Data, 2017).

6.2.3 Social Factors

An analysis of the social and cultural aspects that are likely to affect Nets consists of several different elements, however, we will only elaborate on the most crucial factors in this section. Consumer behavior and trends in the market is of great importance and will most likely have a big influence in terms of the demand of Nets’ products and services. The firm’s ability to anticipate changes in consumer behavior is crucial for the company’s financial performance. Aspects that will most likely affect Nets is thus associated with new trends such as technological development and the increased demand for digitalization.

Payment methods has lately been exposed to a significant change in consumer behavior. The physical card payment at POS terminals in stores has been more and more replaced by consumers’ usage of mobile phones when making a purchase and thus implying a higher demand for mobile payments. This is confirmed by Nets as the company states in its annual report from 2016 that the high transactional growth within digital identity solutions, especially in Norway, was motivated by BankID on Mobile, indicating the need for frictionless solutions for mobile payment (Nets, 2017, p.25).

As the matter of fact, to support payments with mobile, Nets has Figure 13 - Contactless Dankort transactions already announced that the firm is going to launch mobile Dankort Contactless Dankort transactions (m) in 2017. In its annual report from 2016, Nets informed that the 100 85.4 new service will be based on technology such as either NFC, 80

Bluetooth or QR Code, assuring that the speed of payment will be 60 as fast as for contactless card payments. Considering the already 40 high popularity in terms of contactless card payments, as 20 1.9 illustrated in Figure 13, it is reasonable to assume that the 0 consumer behavior will lead to higher adoption toward mobile 2015 2016 payments in the Nordic region. Source: Nets Annual report 2016

Hence, the customers’ behavior in terms of payment solutions and the scope of different options is concluded to be of high relevance in the nearest future. A change in the behavior will, however, depend on the aforementioned political acceptance of new products as well as the opportunities for technological improvement discussed below.

6.2.4 Technological Factors

The payment industry has lately been a subject to disruptive technology, implying that Nets is exposed to significant technological changes. Several new devices and services the last couple of years have both raised the complexity within the market and led to higher uncertainty regarding whether firms such as Nets will manage to obtain their position in the market or if emerging technological innovations will take over their functions.

The leading drivers behind opening up of the financial value chain to contain more platforms where payments can be made are emerging technologies such as contactless features at POS and mobile wallets. Moreover, tokenization in terms of minimizing both costs and complexity regarding security of credit cards and e-commerce transactions is also pushing the development. In addition, the structural shift in the Nordics payment industry from cash to non-cash will go on with additional drive from new technologies, and thus escalating the number of transactions. (DNB Markets, 2017, p.64).

Nonetheless, the development within technology for Nets has mainly been driven by political decisions. A lot of the primary solutions used by the Danes today are products resulted from political work such as NemID and e- boks. However, a desire from consumers regarding faster, easier and smarter solutions has also laid the foundation for new IT platforms offering several payment solutions which will further be discussed.

The fast-growing e-commerce market and the fact that the Nordics are adopting new technology at a much higher level compared to other countries, leads to several opportunities for new payment methods. Online shopping is becoming increasingly favorable among customers as it is a more efficient and cheaper way of shopping. Services such as frictionless checkout where the customers’ payment details are saved contributes to generate online transactions. Moreover, as discussed earlier, during 2017 mobile Dankort will be launched as the new innovative mobile solution. Additionally, mobile wallet solutions are also supporting growth and development in terms of boosting the volume of transactions.

On basis of the above discussions, we believe that technological changes will have a significant impact on the company. Nets ability to follow the technological development is assumed to be strong due to its leading position in the market.

6.3 The VRIO Framework In the following we will evaluate Nets’ most important internal resources and capabilities, and thus analyze whether they can be a source of the company’s competitive advantage.

Reputation A good reputation is essential for a firm to survive. Nets has a long history of good relations with its large established customer base (merchants, banks, corporates and governments), which are built up through many years. Hence, the name “Nets” can be perceived as a brand name. As Nets is active across the entire payment value chain, the firm can be described as the company who offers an “all-in-one”-package when it comes to payment solutions and services. Being known as offering an “all-in-one”-package adds value to the firm, and symbolizes that the company is well-positioned within the industry, hence a competitive advantage.

Furthermore, when recognized as the largest payment services provider in the Nordics (Deutsche Bank Markets Research, 2016), Nets can be considered as a robust and solid company in the payment industry. Moreover, when being the only one offering branded and unique products such as Dankort and NemID in Denmark, and BankAxept in Norway, the company’s reputation is an advantage. On the other hand, if the company fails to adapt to for example structural- and technological changes, it will have an impact on Nets reputation as being the leading payment firm in the Nordics. Hence, the corporate brand could be weakened.

Altogether, Nets has a solid reputation that customers within the payment industry are familiar with due to its high brand awareness in Denmark and Norway, as well as its historical presence. Based on the factors mentioned above, Nets reputation can be characterized as valuable, rare, and difficult to imitate among the competitors. Moreover, Nets is organized to capture value from its good reputation as the company is active across the entire value chain (and offers an “all-in-one” package). The company’s reputation is therefore considered as a sustained competitive advantage.

Capability of adopting new technology Nets operates in an industry that is sensitive to technological changes. The capability of being able to adopt new technology is therefore important in order to stay well positioned to capitalize on future innovation. According

49 to a research report prepared by DNB Markets (2017), Nets has a proven track record in terms of adopting new technology, which we believe is a valuable capability to obtain future value creation.

Over the past years, Nets has launched solutions for mobile - and contactless payment methods, in addition to assisting merchants when it comes to e-commerce and m-commerce, and offering payment solutions to the merchant's’ customers. Thus, Nets has proven that the company has substantial technological knowledge. (DNB Markets, 2017). Furthermore, considering Nets’ already strong technology platform and content, it is reasonable to believe that the company is able to quickly integrate new services, and therefore be capable of taking advantage of future technology innovations.

While operating in an industry driven by changes in technology can be seen as an opportunity to be innovative, there is also risk in terms of failure to predict as well as develop demand for new technology products or services. If Nets fails to adapt new technology, it might cause loss of potential business. Due to the fact that the company offers a well-diversified portfolio of products and services, new technology will most likely not have a great impact on more than one part of Nets’ business. Moreover, Nordea states that Nets cooperates with several companies which are working with new technologies who aims to anticipate future trends (Nordea Markets, 2016, p.105).

Nets’ capability of adopting new technology is undoubtedly valuable in terms of enabling the firm to exploit opportunities. It is also difficult to imitate in the short run as technology platforms and contents are built up during time, in addition to the fact that it is very costly to develop such platforms. Even though the resource is considered as rare to some extent, it is not necessarily difficult for other companies to develop capabilities in order to quickly adopt new technology. However, whether they are able to do this as fast as Nets is hard to tell. It is therefore reasonable to conclude that Nets has a temporary competitive advantage regarding the capability of adopting new technology.

Electronic Invoice Solution & Recurring Payment Systems The electronic invoice solution is widely used in Denmark and Norway, and Nets is the only provider of this solution in the respective countries, hence the resource is highly rare in the industry. Betalingsservice in Denmark and both AvtaleGiro and eFaktura in Norway generates revenues by transaction volume. As the matter of fact, 41% of the firm’s net revenues were from the company’s business unit operating the electronic invoice solutions

50 and recurring payment systems. According to DNB Markets (2017, p.7), approximately 0.83 billion transactions were handled by the electronic invoice solution in 2015 in terms of repeated payments and invoicing products. Thus, the electronic invoice represents a valuable resource for the company. Moreover, taking the effects of regulation such as PSD2 opening up for AISPs and PISPs, solutions like electronic invoice and recurrent payment might face increased competition as it gets easier for new players to offer similar solutions, illustrating a simpler way to imitate this resource, and therefore only a temporary competitive advantage.

National clearing system In 2015, e-bill payments and clearing generated approximately 70% of Nets’ net revenues in the firm’s CS business unit, moreover, the company handled 4 billion clearing transactions during 2015 (DNB Markets, 2017, p.7 and 34). Nets’ National Clearing systems in Denmark and Norway is therefore a valuable resource for the company. On behalf of Finance Norway and granted by Norges Bank, Nets is the operator of the Norwegian Interbank Clearing System (NICS). In Denmark, the company acts as the owner and operator of all three clearing systems applied in the country: Sum Clearing, Intraday Clearing and Express clearing. Only the system for high value transactions is operated by another firm in Denmark on behalf of the Central Bank of Denmark. (DNB Markets, 2017, p.37).

In addition, Nets offers “real-time clearing 24/7” as well, where the firm owns one out of two real-time clearing systems in Europe. Recently, the company has signed an agreement with ICBPI in Italy in order to settle an instant payment solution as of first quarter of 2017. (Nets, 2017, p.28). This highlights the firm’s strong growth within clearing activities. With this agreement, Nets will be delivering and managing instant clearing and settlement of payments in Italy in addition to Denmark and Norway.

Given Nets significant market share of clearing and settlement systems in Norway and Denmark, the resource is quite rare and thus defined as a competitive advantage for the company. Nets’ well-developed technology infrastructure platform lays the fundament for its clearing services. For other companies to offer the same type of service in the market, they would have to be in possession of a platform able to handle volumes of transactions well outside a regular hourly range. The extent of flexibility and scalable skills as witnessed in Nets’ technology platform, is therefore costly to imitate, implying a sustained competitive advantage for the firm. Moreover, Nets is continually improving its platform and has during the past three years made large investments in order to enhance its service deliveries. According to DNB Markets (2017), 42% of the firm’s total headcount are working

51 in the technology division, meaning that the firm is well organized to capture the value obtained from their clearing system.

Digital identification solutions Nets digital identification solutions in Denmark and Norway with NemID and BankID respectively, are a valuable resource for the company. In Denmark, the national digital ID system is owned by both Nets and the Danish government, while in Norway, the service is managed by Nets, but owned by the banks (just as BankAxept). Nets is uniquely positioned to take advantage of new innovations given its leading position. According to Deutsche Bank AG in London (2016), both solutions are significantly popular in their respective geographical areas. Nevertheless, around 80% of the Norwegian adults are users of BankID, implying a good reputation and loyalty towards the service (Deutsche Bank Markets Research, 2016, p.19).

The contracts are signed on a 5-year term, and NemID and BankID will be up for renewal in 2017 and 2019, respectively. Regarding NemID, Nets is the only provider of the national ID system, while BankID in Norway is facing competition from three competitors, MinID, Commfides and Buypass (DNB Markets, 2017, p.35). In terms of the different circumstances, this resource could potentially yield different outcome in the two countries. Yet, we consider the resource as rare in both cases due to the large share of population and given Nets position as strong incumbent.

Nets historical contract extensions illustrates the firm’s reliability and good reputation. Taking the switching costs for end-users into consideration, and the fact that NemID is co-owned by Nets, the chances for renewal of contract are high in Denmark, thus representing a competitive advantage. Regarding BankID in Norway, Nets has been renewing the contract with banks in a period of 15 years (DNB Markets, 2017, p.35). Taking into account Nets’ good reputation in Norway in light of the historical contract extensions and Norwegian customers’ loyalty, the risk of losing this contract is considered as small and thus represents a competitive advantage in Norway as well.

In order to capture the value obtained from the digital identification solutions, Nets has incorporated an action plan to reduce risks, by doing some enhancements in terms of already developed products, but also new services and relationships, in addition to better customer service and pricing (Morgan Stanley, 2016, p.45). By

52 continuously following up and reporting to the executive committee, the company is better suited to protect its digital identification solution, thus yielding a sustained competitive advantage.

Domestic Card Scheme within issuing services Nets is the operator of the domestic card schemes Dankort and BankAxept in Denmark and Norway, respectively. The card schemes generate revenues from a fee per transaction. Considering the fact that Nets handled 1.3 billion transactions on behalf of Dankort and 1.55 billion transactions from BankAxept in 2016 (Nets, 2017, p22- 23), and operates as the only provider of the local debit card scheme in both countries, this resource is of high value for the company. Adding the fact that the resource is considered as rare in the market empowers the company with a competitive advantage.

The card scheme contract in Norway and Denmark expires in 2018 and by end of 2019, respectively. Nets has been the operator of both BankAxept and Dankort from the very start, i.e. 1991 and 1983 respectively (DNB Markets, 2017, p.27). However, more and more banks tend to outsource their card processing, which opens up for Nets to take the opportunity to grow further. Moreover, the advanced technical solutions obtained within the firm’s technology platform in order to provide the financial infrastructure demanded from banks illustrates an expertise that is difficult and costly for competitors to imitate. Nets effective ability to exploit this resource grants the company with a sustained competitive advantage.

However, the share of Dankort and BankAxept transactions have lately been gradually declining compared to the overall market. The Danish National Bank informs that the Dankort share have dropped by approximately 12.2 percentage points during the period from 2010 to 2015. In the same period, BankAxept shares shows a downturn by 6.5 percentage points announced by Norges Bank (DNB Markets, 2017, p.30). This might threaten the value of Nets local debit card scheme in the nearest future. One potential opportunity for the company would be to focus on fees from transactions related to international card schemes due to the fact that these fees are typically higher and thus yields greater level of revenue for the firm. Based on the latter factors, this resource might be considered as rather a medium-term competitive advantage, as in the long-term, demand from customers might change.

6.3.1 VRIO Summary

In sum, the abovementioned resources create a unique competitive advantage for the company, however, some are more important than others. The table below highlights which resources empowers the firm with sustained competitive advantage and thus represents reasons for the firm’s strong market position in the Nordic region. They will further be taken into consideration when developing forecasts in section 0.

Table 10 - Summary of VRIO analysis

Is difficult Is organized Resources/capabilities: Is valuable? Is rare? Result: to imitate? around? Adopt new technology ✓ ✓ Temporary E-Invoice Solution & Rec. Paym. Systems ✓ ✓ competitive Domestic Card Scheme ✓ ✓ ✓

Clearing system ✓ ✓ ✓ ✓ Sustained Digital ID solutions ✓ ✓ ✓ ✓ competitive Reputation ✓ ✓ ✓ ✓ Source: Own production

7. Financial Analysis

Before estimating the company’s financial ratios in order to derive Nets’ profitability and further determine the level of invested capital, we will in the following reorganize financial items from operating items. To obtain a beneficial insight in the firm’s value drivers, we have chosen to look at a historical period of five years, from January 1st 2012 to December 31st 2016, as we believe this is a reasonable period of time to gain better knowledge for later design of pro forma statements. Hence, this section deals with noteworthy accounting items that in our belief needed extra attention. The reformulated income statement and balance sheet is shown in Appendix 5 and Appendix 6, respectively.

New Accounting policy in 2013 - IFRS The reported financial statements in the annual report 2013 have been represented with International Financial Reporting Standards (IFRS). The consolidated financial statement from 2012, which is based on the Danish GAAP, has therefore several other accounting items compared to the annual reports from 2013-2016 which have incorporated the IFRS. However, we will comment below when changes are made due to the fact that Nets has implemented a new accounting policy.

7.1 Reformulated Income Statement Core operations External expenses “Other operating income and expenses” in the annual reports from 2012 and 2013 are added to external expenses in the reformulated income statement, as the company has combined/merged these two accounting items in the subsequent years. This item defines gain and loss related to divestments of plant and equipment.

Special items Special items should be categorized under operations in most cases, but might be categorized as financing in some cases (Petersen & Plenborg, 2012, p. 75-76). However, special items are under operations if they are a part of Nets core business. According to Nets annual report 2016, special items are costs that cannot be directly attributed with the ordinary activities, but rather related to restructuring or processes, fundamental structural adjustments, as well as IPO related costs. The latter applies only in year 2016. Due to the fact that for example restructuring costs appears frequently and are likely to be a part of the company’s day-to-day operations, it is reasonable that special items are a part of Nets’ normal operations. By separating special items, the management are able to split between operating activities and restructuring of the Group, such that they can enhance the future potential earnings.

Special items in 2013 The consolidated income statement for year 2013 has not directly reported the level of special items, it is only explained in the notes (Nets, 2015, p.55). Special items are not present in 2012, and therefore not relevant. The table below illustrates the classification done in order to report the special item value in the reformulated income statement. The value in each accounting item is consequently added to the given item:

Table 11 - Special items

Special items in 2013 (m) Cost of sales External expenses Staff costs Special items: Re-organisation and restructureing costs 70 100 Other costs 19 12 Sum 19 82 100 Total special items in 2013 201 Source: Own production/ Nets Annual Report 2014

Amortisation, Depreciation and Impairment losses By reclassifying depreciation, amortisation and impairment losses we aim to determine EBITDA which will be useful when we are calculating the cash flow statement later (Petersen et al., 2017). This is done for each year by looking into the notes in the annual reports, where we have classified and extracted the numbers in order to separate “Amortisation, Depreciation and Impairment losses”. Moreover, impairment losses are mainly based on negative development projects (Nets, 2017, p.83-84). Therefore, we have chosen to separate impairment losses alone (in order to forecast it later in the paper), as Nets most likely will experience impairment losses in the years to come, as it is expected that there will be some “trying and failing”, especially considering product development in light of PSD2. The classification is illustrated in the table below:

Table 12 – Classification of Amortisation, Depreciation and Impairment losses

Consolidated income statement (m) 2012 2013 2014 2015 2016 Amortisation of business combination intangibles & impairment losses -110 -627 -654 Underlying depreciations and amortisations -298 -271 -416 Depreciation, amortisation and impairment losses -336 -448 Sum -336 -448 -408 -898 -1070

Reformulated income statement (m) 2012 2013 2014 2015 2016 Depreciation -167 -189 -149 -143 -142 Amortisation -163 -252 -257 -711 -917 Impairment losses -6 -7 -2 -44 -11 Sum -336 -448 -408 -898 -1070 Source: Own production/ Nets Annual Reports 2012-2016

Effective tax rates The effective tax rate percentages are computed by Nets in the annual reports, and we have chosen to use these in the reformulated income statement. According to Petersen and Plenborg (2012), the effective tax rate

56 expresses the average rate levied on all the company’s income and shows different tax rates within the group. Hence, we assume that the operating income and the financial income are taxed at the same rate.

It is worth mentioning the extremely high effective tax rate in 2015 (77.3%). This is due to the high tax effect of fair value adjustment of Visa shares and related contingent consideration liability (Nets, 2017, p.97). In contrast, the effective tax rate in 2016 is reduced to 22%, as the financing costs should be beneficial from refinancing at the time of the IPO (UBS Limited, 2016, p.34).

Non-core operations - Net financial income/expenses In the following, we will describe the classification of net financial expenses, summarized in Table 13 below.

Profit from associates after tax Petersen and Plenborg (2012) argues that if “investments in associates” in the reformulated balance sheet is classified as an operating activity, the matching item “profit from associates” should also be labelled as an operating item (and vice versa). Profit from associates are related to the financing part of Nets. See the explanation below in the reformulated balance sheet named “Investments in associates” (section 7.2).

Profit from divestment of business Profit from divestment of business is according to Nets a part of non-core activities (Nets, 2015, p.19), and thus belongs to “finance”. This item was only present in 2014, which supports the fact that it is categorized as a non- operating item.

Financial income & expenses In 2015 and 2016, there has been done some VISA shares adjustments. In order to calculate net financial expenses, we have included “value adjustment on VISA shares” as a financial income, and “value adjustment on debt” as a financial expense.

Refinancing costs & Interest expenses Refinancing costs due to the IPO in 2016 are shown in the table below. Nets has not calculated tax on the refinancing costs, and hence we have treated this item as tax deductible. Therefore, refinancing costs of DKK

738M in 2016 are not a part of the calculated tax on net financial expenses of DKK 17M. The same follows for the interest expenses (stated in the notes in the annual reports), which also are treated as tax deductible.

The table below illustrates the calculations regarding financial income and expenses during the historical period, all numbers in millions:

Table 13 - Classification of financial income and expenses

Classification of financial income and expenses 2012 2013 2014 2015 2016 Profit from associates after tax 30 6 13 -3 4 Profit from divestment of business 0 0 45 0 0 Financial income: Fair value adjustment of Visa Shares 0 0 0 2428 413 Fair value adjustment of Visa Shares related to Teller Branch 0 0 0 0 185 Other financial income 207 111 82 196 0 Financial expenses: Fair value adjustment on liability related to Visa Shares 0 0 0 -1913 -448 Financial expenses excl. refinancing costs & interest expenses -6 -48 -32 -76 -229 Refinancing costs 0 0 0 0 -738 Interest expenses -6 -38 -19 -921 -826 Tax on net financial expenses 56 20 15 491 -17 Net financial income/expenses 281 51 104 202 -1656 Source: Nets Annual Reports 2012-2016

Profit after tax It is worth mentioning that the net profit in 2016 was for the first time in the five-year period negative, with a minus DKK 584M. However, this was expected as net profit in 2016 was significantly impacted by special items and refinancing expenses, with a total of DKK 1,340M. (Nets, 2017).

7.2 Reformulated Balance Sheet Core operations Goodwill and other intangible assets According to Nets’ annual report 2016, current workforce, operational synergies and know-how in relation to business combinations is represented by the firm’s value of goodwill. Therefore, we consider this account as a part of Nets’ core business, thus an operational item. It is also worth mentioning that the goodwill has increased considerably during the last years, from DKK 1,318M in 2014 to DKK 14,646M and DKK 14,720M in 2015 and

2016, respectively. This can be explained by the company’s acquirement of Storebox ApS in 2016 as well as Kortaccept Nordic AB and Signaturgruppen A/S in 2015. (Nets, 2017, p.82). Moreover, other intangible assets consist mainly of customer agreements and development projects, and is included in the reformulated balance sheet as an operating activity (Nets, 2017, p.84).

Deferred tax assets and liabilities Petersen & Plenborg (2012, p.88) argues that deferred tax assets/liabilities will be classified as an operating account due to the fact that tax assets/liabilities are directly related to operations and they usually occur in the balance sheet when assets/liabilities happen to have lower (higher) value than for tax purposes. Moreover, Nets’ annual report from 2016 explains in note 6.1 that deferred tax assets and liabilities account consists of intangible assets, plant & equipment, other receivable, employee benefits obligation as well as deferred tax losses carried forward. Regarding other receivables, employee benefits obligation and tax loss carried forward, Nets does not provide information that enable us to decide whether these values are linked to Nets’ operations or financing. However, none of the aforementioned items are recognized as assets that earns interest for Nets, hence we believe they should be treated as operational.

Clearing related assets and liabilities Nets states in its annual report from 2016 that clearing related assets consists of settlement assets and receivable from cardholders, and are thus classified as a part of Nets core operations. Clearing related liabilities consist primarily of liabilities to merchant creditors, settlement obligations and prepayments from cardholders. Thus, representing a clearing transaction, in other words an operational activity for the firm.

Other line items There are three operational accounts from 2012 that is not described further in the firm’s notes, nor have they clarified where the items have been allocated in the years after 2012. Hence, we chose to include them in the reformulated balance sheet in 2012 as they represent part of Nets’ day-to-day business, however, we will not continue to focus on these items as the company itself chooses not to. They will therefore only be present in 2012. This regards tax receivables, provision from non-current liabilities and deferred income.

Non-core operations Deferred consideration for business combinations According to Nets (2017, p.16), the firm clarifies in its latest annual report that in relation to past acquisitions, more precisely Signaturgruppen A/S in 2015 and Storebox ApS in 2016, deferred consideration is related to future earn-out payments. Hence, we consider this account as mainly related to the company’s equity, and therefore not considered as Nets’ day-to-day operations.

The following noteworthy items are classified as interest bearing assets and debt Current tax liabilities Nets current tax liabilities is of short-term nature, meaning that the firm is expected to pay the tax within the next 12 months. Due to the fact that this account has no cash flow effect for Nets in the future, we believe it is reasonable to classify current tax liabilities as a financial item.

Derivative financial instruments Nets (2017) points out in its annual report for 2016 that derivatives are categorized as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. Hence, derivative financial instrument account is categorized as a financial activity.

Pension liabilities, net Pension assets/liabilities is calculated as the present value of future repayments from pension plans, or of reduced future funding commitments. Due to the fact that recognized pension benefits are interest bearing (since they are discounted to present value), it is natural to classify net pension liabilities as a financing activity, i.e. as interest-bearing debt. (Nets, 2017, p.103).

Investments in associates Petersen and Plenborg (2012, p.76) argues that a firm's income in relation to an investment which is not representing the company’s core business, should be classified as a financial item. In other words, it is only representing excess cash which is considered as not necessary to operate the firm. Hence, we believe that e- Boks does not represent Nets’ actual operation due to the fact that e-Boks is only a part of Nets solution regarding digitization and information for companies. Nets is offering distribution of documents to customers of firms’ by sending it either as PDF-file to their e-mail, e-Boks or as a physical letter. Moreover, Nets (2017) informed in the

60 annual report from 2016 that the results of e-Boks’ operations are reflected in the firm’s income statement. They are not mentioning e-Boks anywhere else, nor is the operations further explained. Therefore, we believe e-Boks is related to the financing of Nets operations.

Other financial assets & liabilities This accounting item consists mainly of fair value adjustments of VISA Inc. shares, and is therefore natural to treat as interest-bearing debt (consistency with the classification in the reformulated income statement). (Nets, 2017, p.105)

Cash and cash equivalents Ideally, we would prefer to separate this item into an operating part and a financial part. However, the item is not distinguishable in the annual reports so it is a very difficult task. We have therefore used common practice and treated all cash as excess cash, and thus a financing activity, i.e. as interest-bearing debt.

7.3 Profitability Analysis In the following we wish to highlight the most important factors behind Nets’ historical performance. As mentioned in section 5.2.2, the Du Pont model is used to derive our estimations. Moreover, ratios computed from the balance sheet are based on average numbers. Taking into account the company’s distinctive business model and thus no direct competitors in the Nordic payment industry, we have chosen to look at only Nets’ historical performance as we believe that comparing the company with firms not carrying similar business models could give a wrong impression. However, we have completed a relative valuation approach based on multiples in section 11.3.

ROIC after tax ROIC after tax is a function of NOPAT and invested capital which is useful when analyzing Nets’ ability to create returns on capital invested. From Figure 14 below, we see that ROIC exceeds the average cost of capital to the firm’s debt- and equity-holders during the historical period until 2015. This resulted in economic value added for Nets’ investors. However, in 2015 Nets experienced a decrease in ROIC which can be explained by the numerous acquirements of businesses during 2014 and 2015, and thus no creation of value for the firm’s shareholders. Moreover, the level of Nets’ invested capital does not represent a steady development which is also underlined

61 by the significant increase in goodwill in 2014 due to acquisition of DIBS Payment Services AB and Payzone Nordic AB. In addition, Nets acquirement of three new businesses in 2015 and 2016 resulted in an even higher level of goodwill. Petersen et. al (2017, p.143) states that calculation of ROIC works best if the company aims to obtain a development in invested capital without severe changes from year to year. This is not the case for Nets, hence we need to take into account that the measure of ROIC could potentially be noisy.

Figure 14 - ROIC vs. WACC

ROIC vs. WACC 70% 60% 50% 40% 30% EVA for investors 20% 10% 0% -10% 2013 2014 2015 2016

WACC ROIC incl. goodwill

Source: Own production/ Annual reports 2013-2016

Turnover ratio incl. goodwill and profit margin By decomposing ROIC into turnover rate of invested capital and profit margin, we hope to better understand the source of Nets value creation within operating activities (Petersen & Plenborg, 2012). The turnover rate for Nets has during the historical period been heavily affected by the firm’s lately increased level of acquisitions, thus lowering the turnover rate in 2015 and 2016. To maintain a sufficiently return on invested capital, Nets should have an increasing profit margin to compensate for the declining turnover ratio (Petersen et al., 2017, p.157). This seems to be the case for Nets as its profit margin have increased in 2016 by 7.9% underlining the positive change from negative NOPAT to positive values in 2016. However, it could be argued that this is due to the IPO strengthening Nets’ capital. In order to analyze the value creation within operating activities further, we will include common-size and trend analysis of the company’s invested capital as well.

Table 14 - Turnover ratio and profit margin

2012 2013 2014 2015 2016 Average Turnover ratio incl. goodwill 7.78 4.28 0.71 0.43 3.30 Profit margin 7.0% 8.3% 8.4% -1.2% 14.5% 7.5% Source: Own production/ Annual reports 2012-2016

Gross margin Nets’ gross margin reflects that the company’s ability for payment of capacity costs and profit has during the historical period been over 80% of sales when removing productions costs (Jensen, 2015, p.7). Furthermore, it has continuously increased by almost 2% every year with the final of 87% in 2016. However, as we have no explanation regarding which of the three business units’ gross margin originates from, we find that this metric is of little value and will thus focus more on the EBITDA b.s.i. margin.

Table 15 - Gross margin

2012 2013 2014 2015 2016 Average Gross margin 81.9% 83.1% 83.5% 85.6% 87.0% 84.8% Source: Own production/ Annual reports 2012-2016

EBITDA b.s.i. margin Nets has the past few years experienced significant transformation when it comes to customer-focus and innovation (Nets, 2017, p.3). By implementation of the transformation programme, Nets has improved its efficiency and operating leverage as net revenue has grown. This has been driving the positive development of EBITDA b.s.i. as well, and is further confirmed by the continuous rise in EBITDA b.s.i. margin as laid out in Table 16. The listing on Nasdaq Copenhagen in 2016 was also considered as a positive impact on the margin as it increased by 2.6% ending at 35.5% in 2016.

Table 16 - EBITDA b.s.i. margin

2012 2013 2014 2015 2016 Average EBITDA b.s.i. margin 18.1% 22.7% 25.4% 32.9% 35.5% 29.1% Source: Own production/ Annual reports 2012-2016

Because we are able to determine how big part of EBITDA b.s.i. margin originates from each business segment, as highlighted in Table 17 below, this metric is of great value. From the annual report 2016, Nets states that

EBITDA b.s.i. in the MS segment was DKK 792M, which is up 4.2% compared to last year (Nets, 2017, p.20). Thus, EBITDA b.s.i. margin for this business unit was 34.2%. Operating leverage has acted as a support to the increased top line and together with the positive outcome from interchange fee regulation, MS was able to increase its profitability compared to the 30.0% margin in 2015. The strong growth in revenue is mainly related to card transactions in acquiring and the amount of transactions in e-commerce. Moreover, Nets acquisition of Nordea’s merchant acquiring services in December 2015 and yet another platform during 2016 named Storebox AS, have also contributed to the business unit’s growth. (Nets, 2017, p.19-20)

Nevertheless, FNS had at year end of 2016 an EBITDA b.s.i. of DKK 893M, resulting in a margin of 39.3% as shown in Table 17. This is an increase by 2.6% from the year before. However, the positive effect from the acquisition of Nordea Merchant Acquiring on Nets’ MS segment resulted in weaker growth of revenue in the FNS business unit in 2016. Services which was then provided to Nordea could no longer be accounted for as revenue from third parties due to the acquisition, hence FNS distributed only 3.0% growth in revenue (Nets, 2017, p.22). On the other hand, EBITDA b.s.i. margin was up 2.6% compared to 2015, illustrating growth in profitability as a result of improving the firm’s operations which lead to more automatized processes and reduction in complexity (Nets, 2017, p.23).

CS went up 1.6% to 33.4% in EBITDA b.s.i. margin, representing the lowest share of total EBITDA b.s.i. margin, as illustrated by Table 17. As for MS, CS experienced positive growth in profitability due to incorporation of the transformation programme. (Nets, 2017, p.23). In the meantime, CS’ financial performance regarding growth in revenues consisted of only 1.1% increase compared to DKK 2,764M in revenues the year before. Both direct debit services and clearing activities saw growth. The latter due to a contract with ICBPI in Italy. However, e-security services experienced a slight decline in revenues in relation to its cost plus model which generated less revenue this year. (Nets, 2017, p.24)

Table 17 - Business segments historical development

2016, DKK (m) Revenue EBITDA b.s.i. EBITDA b.s.i. margin Merchant Services 2317 792 34.2% Financial and Network Services 2273 893 39.3% Corporate Services 2795 934 33.4% Group 7385 2619 35.5 % Source: Own production/ Annual reports 2016

The business units’ historical development is graphed in Figure 15 as well. Note that we could only include margins from the interval 2014 to 2016 due to no information regarding EBITDA b.s.i. per business area in previous years. Figure 15 shows that CS segment has accounted for the largest EBITDA b.s.i. margin throughout the historical period. Due to the fact that Nets has been the operator of the National Clearing system in Denmark and Norway since 2010 (Barclays Capital Inc., 2016, p.14), we have strong belief that this trend will maintain in the future, which will be further discussed in section 0.

Figure 15 - Historical EBITDA b.s.i. per unit Figure 16 - EBITDA, EBIT, Profit & NOPAT

Historical EBITDA b.s.i per business unit Historical Development of EBITDA, EBIT, Profit and NOPAT 1100 40% 1500

30% 900 1000 20% 700 500 10% DKK, (m) DKK, DKK, (m) DKK, 500 0 0% 2012 2013 2014 2015 2016 300 -10% -500 2014 2015 2016 NOPAT EBITDA Margin Merchant Services Profit margin EBIT margin Financial and Network Services EBITDA b.s.i margin Corporate Services

Source: Own production/ Annual reports 2014-2016 Source: Own production/ Annual reports 2012-2016

EBITDA -, EBIT - and profit margin EBITDA margin is calculated after special items have been deducted. Since 2014, EBITDA margin have been increasing every year, and was 2.2% higher in 2016 compared to 2015. From Figure 16, we see that EBITDA margin rises in line with the company’s rise in operating activities and thus growth in revenues during 2015 and 2016. By lowering cost of sales continuously since 2013, Nets has managed to improve its efficiency despite the number of business acquisitions during the same period. Moreover, the ongoing implementation of the firm’s transformation programme combined with IPO-related costs as well as restructuring of the firm’s technology area and customer services, gives an impression of the company’s strong control on special items. As Figure 16 shows, this resulted in an EBITDA margin rise from 25% to 27.3% in 2016. Nevertheless, special items are expected to be a part of Nets’ day-to-day operations in short-term, however, in medium-to-long term this accounting line is assumed to be zero. Based on this, we have decided to focus on both margins in our forecast period.

On the other hand, Figure 16 shows a decline in EBIT margin during 2015. This is due to an increased level of write-downs for impairment in development projects equal to DKK 43M (Nets, 2016, p.102). However, with less impairment losses the following year, Nets managed to turn the margin in 2016 to almost the same level as in 2014. Additionally, the downfall in profit margin in 2015 can be explained by the negative NOPAT the same year. This is related to the significant increase in income tax expenses due to higher level of foreign exchange adjustments as well as fair value adjustments in terms of tax effects from shares (Nets, 2016, p.123). Considering the agreement of acquiring 100% of share capital in Visa Europe Ltd. in November 2015, Nets’ net financials was negatively affected, and thus decreased NOPAT further as the firm’s financial assets related to Visa Europe Share had to be adjusted to fair value (Nets, 2016, p.132). However, net financials in 2016 was significantly impacted by refinancing costs following the IPO. The firm’s NOPAT experienced an exceptional rise as illustrated above, thus boosting the profit margin as well.

NIBD to EBITDA b.s.i. ratio Nets operating earnings capacity to repay debt had a negative development in 2015 due to several business acquisitions resulting in a significant increase in the company’s borrowings and thus NIBD. However, in connection to the IPO, NIBD went significantly down resulting in a better financial position for the company. This is also underlined in Table 18 below as the NIBD / EBITDA b.s.i. ratio improved by approximately 40% from 2015 to 2016.

Table 18- Net interest bearing debt to EBITDA b.s.i ratio

2012 2013 2014 2015 2016 Average NIBD / EBITDA b.s.i -1.02 -1.19 0.11 5.17 2.87 1.74 Source: Own production/ Annual reports 2012-2016

Financial Gearing Nets had negative financial leverage in 2012 and 2013, implying that activities were funded by owners and not creditors. However, in 2015 the company had a significant increase by over 200%. This can be explained by the high level of new business combinations during 2015. Nevertheless, as an offset by the repayment of borrowings comprising DKK 1,079M, Nets obtained proceeds amounting to DKK 1,636M from new borrowings in 2015 (Nets, 2017, p.16). In 2016, the firm used existing cash and new bank facilities to refinance and pay the existing debt as well as fees, costs and expenses associated with the IPO. (Nets, 2017, p.91). Hence, financial gearing declined to

74.6%, illustrating a lower amount of its activities funded by creditors and more by the owner’s funds. The firm took on new bank loans of DKK 9,040M which was offset after repaying the total amount of DKK 14,481M covering settlement of interest swaps and existing bank loans (Nets, 2017, p.16).

Table 19 - Financial Gearing

2012 2013 2014 2015 2016 Average Financial Gearing -47.0% -78.7% 7.5% 226.0% 74.6% 57.4% Source: Own production/ Annual reports 2012-2016

Return on Equity (ROE) ROE is the most important measurement for Nets’ shareholders as the company’s financial position will highly impact the level of return on their investments (Petersen & Plenborg, 2012, p.117). The firm’s net financial expenses were heavily impacted by refinancing costs. Moreover, foreign exchange adjustments had a negative impact of DKK 147M in 2016, primarily driven by the company’s borrowings in NOK (Nets, 2017, p.14). Taking this into consideration, we see that shareholders return on investments was negative in 2016 as Figure 17 below illustrates. This is also expressed in the firm’s negative profit after tax of DKK 584M. Based on the aforementioned analysis of Nets financial gearing we can conclude that the effect of financial leverage on owner’s return had a significant impact in 2014 and going forward.

Figure 17- ROE

Historical ROE

30% 25% 20% 15% 10% 5% 0% -5% 2012 2013 2014 2015 2016 -10% ROE

Source: Own production/ Annual reports 2012-2016

This is also confirmed when analyzing the company’s historical net borrowing cost (NBC) and the differences between ROIC and NBC, also known as spread. From Table 20 we see that negative spread in 2014 and 2015 underlines the negative impact on ROE when Nets increased its borrowings. In 2016, however, ROIC was higher than NBC implying that Nets had produced value for its owners through financial gearing. The negative value of NBC can be explained by the firm’s remarkable increase in net financial expenses as mentioned above.

Table 20 - ROIC, NBC and Spread

2013 2014 2015 2016 Average ROIC incl. goodwill 65.0% 35.8% -0.9% 6.2% 26.5% Net Borrowing Cost -2.8% 58.1% 1.7% -22.0% 8.8% Spread 67.8% -22.3% -2.6% 28.2% 17.8% Source: Own production/ Annual reports 2013-2016

Accounts Receivable Days Throughout the historical period, Nets has managed to improve its ability to convert inventory such as terminals used at POS into sales by decreasing the ratio from 62 days in 2012 to 25 days the last two years, as Figure 18 shows. Regarding trade and other receivables, the amount of days Nets uses to collect its receivables has slightly increased every year from 2013 to the maximum of 44 days in 2015. However, during 2015 the firm managed to recover its capability to collect payments from its customers.

Figure 18 - Inventory days and Trade & other receivable days

Hist. Inventory Days and Trade & Other Receivable Days 70 60 50 40 30 20 10 0 2012 2013 2014 2015 2016

Inventory Days Trade and other receivables

Source: Own production/ Annual reports 2012-2016

In light of the illustrated improvements, the firm has managed to get more cost efficient. Given its level of reorganization and restructuring in 2016, as well as the planned expansion of implemented robots in the coming year (Nets, 2017, p.28), we believe Nets will continue being more cost efficient. This will be further discussed in our forecast.

Accounts Payables Days By analyzing the firm’s historical accounts payables days in relation to trade and other payables, we can better understand the company’s financial condition (Petersen & Plenborg, 2012) From Table 21 below, we see that the number of days have increased every year until 2016. During the latter year, we notice that the direction changed towards fewer days, indicating that Nets has improved its financial condition and use less days to pay the suppliers which is also as expected considering the change in capital structure the same year.

Table 21- Trade and other payables

2012 2013 2014 2015 2016 Average Trade and other payables 382 365 443 692 612 528 Source: Own production/ Annual reports 2012-2016

7.4 Liquidity Analysis Short-term liquidity risk In order to understand how fast the company can transform working capital into cash we have determined Nets short-term liquidity risk by calculating the liquidity cycle. Our analysis is not supplemented with measurements relative to Nets’ peers, thus assumptions regarding the firm’s financial position could potentially be weak. However, based on the situation that Nets is the only operator of the National Clearing system in Denmark and Norway, we believe that our analysis of the firm’s financial position is still valuable and useful in later discussions.

Table 22 - Liquidity cycle

Based on trade and other receivables/payables 2012 2013 2014 2015 2016 Days inventory in hand 62 42 28 25 25 Days accounts receivable in hand - trade and other receivables 37 35 39 44 40 Days accounts payable in hand - trade and other payables 382 365 443 692 612 Liquidity cycle (days) 482 442 511 761 676 Turnover rate for NWC 0.76 0.83 0.71 0.48 0.54 Source: Own production/ Annual reports 2012-2016

Table 22 shows Nets’ liquidity cycle based on trade and other receivables as well as payables. The liquidity cycle reveals that the number of days has increased significantly starting as of 2013, which can be explained by the firm’s new business combinations these years. The drop in 2016 is mostly due to repayments of borrowings in connection to the IPO as it empowered the company with a higher level of equity. the company with a higher level of equity.

Considering the liquidity cycle based on clearing related assets and liabilities, it is quite hard to obtain the correct impression of the company’s liquidity when analyzing clearing-related liabilities. This because the cycle will stretch over several years. Moreover, clearing-related liabilities has no connection with the company’s cost of sales as processing transactions on behalf of Nets’ customers have no primarily costs related to the service other than acting as a “mover” and “keeper” of the cardholder's purchase during its transaction (Nets, 2017, p.76).

We have therefore decided to calculate the liquidity cycle based on clearing-related assets and liabilities in light of revenues. By looking at clearing-related liabilities turnover we obtain the amount of days Nets uses to collect payment in relation to not yet settled transactions and the firm’s obligations to issuing banks. In our belief, Table 23 presents a more useful historical trend that gives a better understanding of the company’s liquidity cycle in connection to clearing-related balances.

Table 23 - Liquidity cycle in light of net revenues

Based on clearing-related assets & liabilities in light of revenues 2012 2013 2014 2015 2016 Days inventory in hand 62 42 28 25 25 Days accounts receivable in hand - clearing related assets 384 273 284 198 221 Clearing-related liabilities Turnover 448 348 273 239 254 Liquidity cycle (days) 895 663 586 462 500 Turnover rate for NWC 0.41 0.55 0.62 0.79 0.73 Source: Own production/ Annual reports 2012-2016

The historical trend in Table 23 indicates that the number of days used to receive settlement assets has decreased remarkably since 2012. However, during 2016 we see that the firm experienced an increase in days used to collect payments, such as transaction fees, by 23 days up to a total of 221 days. Clearing-related liabilities turnover, on the other hand, has improved its number of days by nearly 38% when comparing 2012 with 2016. This implies more effective processing of transactions. The rise in days during 2016, however, can be explained by the strong growth in clearing activities driven by the signed contract with ICBPI in Italy as well as the increased transaction volume from 0.83 billion to 0.87 billion (Nets, 2017, p.24-25). Despite the rise in 2016, we believe that the company’s improvements are of great value when considering possible changes within the payment industry in relation to more account-based payments as PSD2 goes into force in 2018. This will therefore be taken into account in our forecast section.

Current Ratio By calculating Nets’ current ratio, we can better determine whether the firm’s working capital is at a satisfactory level or not, in order to meet its short-term needs (Berk & DeMarzo, 2017, p.70-71). From Figure 19, we see that Nets had its highest current ratio in 2014, close to 1.00, which is expected as the company’s highest level of net working capital was in 2014. The drop in 2015 implies that the company are facing a bit more risk if it senses a shortfall in cash in the nearest future (Berk & DeMarzo, 2017, p.71). However, as the figure illustrates, current ratio increases during 2016 from 0.75 to 0.82, indicating that working capital has improved since the downfall last year, and moving towards a more satisfactory level.

Figure 19 - Current ratio

Historical Current Ratio 1.00

0.95

0.90

0.85

0.80

0.75

0.70 2012 2013 2014 2015 2016

Current Ratio

Source: Own production/ Annual reports 2012-2016

7.5 Indexing and Common-size analysis

The following analyzes have been conducted to substantiate the discussion we made in the profitability section, and thereafter in order to substantiate the justifications we make in the forecasting section.

7.5.1 Revenue and Operating Expenses

The trend and common-size analysis of Nets is shown in Appendix 8. From the profitability analysis above (section 7.3), we saw the profit margin increased from 7% in 2012 to 14.5% in 2016. The trend analysis shows that Nets’ net revenues increased every year, and in total by 24% from 2012 to 2016. The increase in the recent year was, according to the management, due to higher volumes, strengthened commercialisation of the business, and through recent acquisitions. In addition, the company experienced a strong growth in the Swedish market in 2016, resulting in an increase in revenues to DKK 542M (up by DKK 201M, i.e. up by 59%). (Nets, 2017, p.13). Therefore, the possibility to grow in Sweden is a great opportunity for Nets in the future, which will be accounted for in the forecasting chapter. Furthermore, while revenues increased, cost of sales decreased by 11% during the historical period. This corresponds with the positive evolvement in Nets’ profit margin. By looking on the evolvement of cost of sales as a percentage of net revenues, it shows that cost of sales has decreased from 18% in 2012 to 13% in 2016.

External expenses varied up and down throughout the period, and in total decreased by 3% from 2012 to 2016. However, external expenses raised by 2% in 2016 (24% of revenues), compared to 2015 (25% of revenues). The increase the last year is due to technology development and more marketing related activities. On the other hand, the company also did several activities to reduce external expenses the same year, such as optimisation regarding IT sourcing, operational processes, and improved procurement. (Nets, 2017)

Moreover, staff costs increased at a lower rate than growth in net revenues, which means that Nets is capable to deal with these expenses relatively closely. However, the staff costs have increased in 2016 due to acquisitions, which will be taken into account in the forecasting of staff costs. On the other hand, depreciation, amortisation and impairment expenses increased at a higher rate than the growth in net revenues. It is primarily the amortisation of business combinations of intangible assets, and mainly the full year impact of the Kortaccept AB- acquisition, that drives the high growth in these costs. (Nets, 2017, p.14). However, there are no planned M&A’s in the medium-term guidance, which will be considered in the forecasting section.

7.5.2 Invested Capital

From the profitability analysis above in section 7.3, we saw that the turnover rate from invested capital revealed a decrease during the five-year period. A reduction from 7.78 in 2013 to 0.43 in 2016 implies that Nets has tied up invested capital in additional 2 years and 72 days, or alternatively Nets need to finance €1 of invested capital in 2 years and 119 days in 2016 in comparison to only 47 days in 2013 (365/turnover ratio of invested capital). Due to the remarkable development in the company’s turnover rate, we will use a trend analysis of invested capital in order to obtain a better knowledge of how the capital utilisation has evolved during time.

The trend and common-size analysis of Nets is shown in Appendix 9. Nets has, in 2016, more than 14 times as high invested capital as for five years ago, implying an increase from 2012 to 2016 of the extreme value of 1,424%. The analysis illustrates that the company’s invested capital primarily consists of intangible assets and deferred tax assets and liabilities. As already discussed, Nets’ has made substantial investments in intangible assets the last two years, primarily in goodwill with DKK 14,646M and DKK 14,721M in 2015 and 2016, respectively. The high acquisition activity seems to be the main reason for the significant increase in invested capital. In addition, Nets’ net revenues increased by only 24% during the historical period, which is significantly lower than the growth in invested capital, and thus resulted in a significant lower ROIC in 2015 and 2016 (discussed more detailed in the profitability analysis). Going forward, we do not expect the fast-growing trend to continue at the same rate, but rather smooth out over time, ref. no planned M&A activities as mentioned above.

8. SWOT - Connecting the analyzes

Table 24 - SWOT

SWOT Strengths - #1 player in the Nordic digital payments market - Active across the entire payment value chain

- Good reputation and long track-record of contracts - Capable of adopting new technology S - Only provider of electronic invoice solution & recurring paym. system in DK & NOR - Handles National Clearing system in DK & NOR - Provider and owner of Digital identification solution in DK - Provider of Domestic Card Scheme in DK & NOR Weaknesses

- Domestic card schemes have lost some share of total card transactions because of International card networks (Visa and Mastercard) W - Sensitive to foreign exchange adjustments, especially DKK/NOK

Opportunities - Structurally growing and attractive market - Gain more market share in SWE - Outsourcing trend among banks O - PSD2: become partner of choice for TPPs - Benefit from structural trend towards non-cash payments - Take advantage of the expected demand for value added services with solutions such as fraud prevention

Threats - Key contracts up for renewal in coming years - PSD2 opens for new players. i.e. increased competition T - PSD2’s high focus on security might lead to less usability of products offered

- New substitute products

9. Forecasting

Before we start with our assumptions regarding forecasting of the individual accounting items, we must determine the proper length of our forecasting period. Based on several new investments undertaken by the company and an increase in the firm’s innovations in order to meet the expectations from PSD2, as discussed in our strategic analysis, we believe these factors will have an impact on the company’s efficiency over the next years. Moreover, bearing in mind that the company will reach steady state performance in the terminal, we have decided a forecast period of six years into the future, where the 7th year will be our terminal period.

Furthermore, we will divide our forecasting period into short-term, medium-term and long-term, where the first two years forecasted represents the company’s short-term outlook, while medium-term will be the next four years, and finally long-term includes the firm’s final and terminal year.

9.1 Forecast Assumptions Our forecast assumptions are primarily based on the company’s strategic – and financial value drivers which we believe affects Nets’ cash flows and value. In order to forecast the income statement, we have determined and forecasted Nets’ financial value drivers and cost drivers. Further, we have forecasted the investment drivers and decomposed net working capital in order to forecast the balance sheet. Finally, financing drivers such as retained earnings and other equity accounts like NIBD are computed and forecasted in order to complete the forecasting of Nets’ balance sheet. The forecast assumptions are summarized in Appendix 12.

Moreover, we have built a revenue forecast based on a top-down approach when implementing our assumptions for the individual accounting items. Next section elaborates on assumptions taken in order to reflect the company’s target position in the future.

9.1.1 Pro Forma Income Statement

Financial Value Drivers Revenue Growth Due to the IPO in 2016, Nets experienced a huge increase in revenue growth compared to the year before. In 2015, however, revenues grew 0.4% faster than the average growth in the Nordic payment industry, implying that the firm is growing faster than the industry.

Nets ability to grow further in the future will at some extent be depended on the company’s ability to position itself in the payment industry as PSD2 goes into force and opens up for new entrants. As discussed in Porter’s Five Forces, the threat from new entrants is considered low in well-established POS payment ecosystems. However, in newer digital technology such as e-commerce, peer-2-peer and mobile payments, companies might experience an increase in number of competitors. Moreover, we believe that due to increased popularity among these business models, the pressure on card payments along with high threat from account-based payments, leads to a decrease in Nets revenue growth to 3.5% in the short-term and towards a growth of 2% in the terminal year.

As mentioned in the trend analysis in section 7.5.1, it is important to bear in mind that the company has potential of increasing its market share in Sweden as a merchant acquirer as well as boosting its revenue growth even further due to banks outsourcing over time. On the other hand, taking into consideration that the competitive rivalry among existing firms already is high, especially in Nets’ FNS business unit in terms of card issuers, we believe it is reasonable to assume that the company will not be able to keep growing faster than the average Nordic payment industry, but rather a bit slower.

Revenues per business unit The company’s MS segment has potential to increase as consumers tend to switch from cash to non-cash payments, thus raising the demand for POS terminals. From our external analysis, we elaborated the possible threats from potential entrants, and based on the facts that Nets’ domestic card scheme is well positioned, in addition to the firm’s all-in-one solution, we concluded the threat as low, ref. section 6.1.1. Moreover, Nets broad offer of products and services compared to its competitors underlines the company’s high power in the payment industry.

It is also expected that e-commerce transactions will grow in the future due to increased online shopping. Considering Nets delivery of necessary technology when it comes to digital payments such as payment gateways online and on mobile, we believe this segment will be able to continue generating approximately 30% of total net revenues. Moreover, we see an opportunity of geographical expansion in Sweden by expanding the customer base and continue to strengthen the POS share in this country. However, as we expect FNS- and CS segment to generate a larger part of the company’s total net revenues, this percentage will decline to 26.5% in the terminal.

The FNS segment could face a potential drop in revenues if the high rivalry among existing competitors in terms of card issuers result in a decline of Dankort transactions as PSD2 introduces PISPs. As elaborated in section 2.4, PISPs could potentially put pressure on card payments due to larger usage of account-based payments. Additionally, the changes regarding interchange fee might lead to a further decline in debit card transactions considering consumer's choice of which type of card scheme the transaction will be routed through at POS, as deliberated under political factors in section 6.2.1.

However, we expect higher demand for value added services in short-term due to greater attention in terms of fraud prevention now as PSD2 opens up for AISP and PISP. Moreover, the FNS segment has a great potential when it comes to geographical expansion to Sweden as well. As mentioned earlier, more and more banks tend to outsource their non-core activities to TPPs. This may lead to further opportunity to grow within outsourcing of issuing processing, as it historically is performed in-house in Sweden. Based on our analysis of the company’s resources, ref. section 6.3, we believe the company will take advantage of this. Furthermore, Nets has also an opportunity to offer value-added services such as white label mobile wallets and thus satisfy consumers higher demand for mobile payments as discussed in section 6.2.3 regarding social factors. Hence, we predict the FNS segment to generate a higher amount of the company’s total net revenues going forward and stand for 33.5% of revenues in the terminal.

Finally, the CS business unit is predicted to maintain its high share of total net revenues due to expected renewal of contracts in 2017 and 2019 regarding digital identification solutions in Denmark and Norway. However, it could potentially be argued that the company is facing some rivalry in terms of new entrants offering e-bill payments, thus threatening electronic invoice and recurring payments. On the other hand, taking the firm’s leading position in this segment into account, especially when considering the National Clearing system, we believe it will not have a significant impact on revenues generated in this segment.

Considering changes in consumer behavior towards higher demand for account-based payments as mentioned above, we predict that Nets’ CS segment have potential to grow in the forecasted period as transactions from card-based infrastructures most likely will move to transactions in account-based infrastructures. An example of this could be if services such as Betalingsservice in Denmark gets developed into a “mobile Betalingsservice” where consumers can manage all their bills in one application on their mobile. With this in mind, we expect CS to account for 40% of the firm’s total net revenues in the terminal. Table 25 below summarizes the aforementioned predictions per business unit.

Table 25 - Revenues per business unit in % and millions

Revenues per business unit in % 2017E 2018E 2019E 2020E 2021E 2022E Terminal Merchant Services 31.4% 31.0% 30.5% 29.5% 28.5% 27.5% 26.5% Financial & Network Services 30.8% 31.0% 31.5% 32.0% 32.5% 33.0% 33.5% Corporate Services 37.8% 38.0% 38.0% 38.5% 39.0% 39.5% 40.0% Net revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Revenues per business unit (m) 2017E 2018E 2019E 2020E 2021E 2022E Terminal Merchant Services 2398 2441 2469 2448 2412 2374 2333 Financial & Network Services 2354 2441 2554 2660 2755 2854 2955 Corporate Services 2891 2992 3085 3204 3310 3420 3532 Net revenues 7643 7873 8109 8312 8478 8647 8820 Source: Own production

Cost Drivers Cost of sales The company’s cost of sales has during the historical period of 2012 to 2016 decreased by 11% as illustrated in our trend analysis of revenues and operating expenses in section 7.5.1. Moreover, as a percentage of revenue, Nets has managed to lower its cost of sales from 18% of revenues in 2012 to 13% of revenues in 2016. The management has informed in its annual report from 2016 that their cost of sales originates mainly from their CS segment where banks in Denmark are paid for their work done in relation to Betalingsservice and from MS business unit which handles POS business (Nets, 2017, p.13).

Based on the firm’s announcement of moving ideas from the company’s Digital Innovation Lab into production in 2017 (Nets, 2017, p.29), and the development of new technological solutions such as mobile Dankort and e- wallet, we assume that cost of sales will increase in the short-term to 14% of revenue. On the other hand, Nets

78 implementation of 28 robots has shown a remarkable reduction in onboarding time for new acquiring customers as well as new customers in Betalingsservice, illustrating improved productivity (Nets, 2017, p.28).

Furthermore, as discussed in our external analysis, suppliers bargaining power are assumed to be low due to Nets’ successful negotiations over the past years where the company has managed to negotiate low sourcing costs from vendors for POS payment terminals. Moreover, IT costs per transactions has decreased from 2014 to 2016, hence we could expect the same decrease in further forecast. (Nets.eu, 2017b)

Based on the aforementioned factors, we assume that the company will be able to decrease its cost of sales as a percentage of revenue in the medium-to-long term and sustain at a level of low 13%.

External expenses As explained in our trend and common-size analysis of revenues and operating expenses, Nets has managed to lower its external expenses as a percentage of revenue from 30% in 2014, to 24% in 2016. The management informed in 2016 that consulting fees and partnership related to the company’s technology development as well as marketing activities are main drivers behind external expenses (Nets, 2017, p.14). Taking into account the speed of technology development, especially when considering the digitalization of the payment industry, we could expect higher external expenses in the future.

However, based on our PEST analysis regarding technological factors, Nets ability to follow the technological development is considered as strong due to its investment in and well-developed technological platform. Thus, we have forecasted the company’s external expenses to continue the same trend as in the last two years. In short-term, we assume external expenses to equal 24.5% of revenues as we believe the company will be preparing for changes related to PSD2, and then slightly increase to 25% of revenues in 2018. This because we assume PSD2 could open up for potential new partnerships. External expenses are then expected to remain constant at 25% in the long-term and finally in the terminal year.

Staff costs Staff costs has the last year experienced a rise, as highlighted in our trend and common size-analysis. According to Nets, the increase in staff costs by 9% in 2016 was primarily driven by the acquirement of Kortaccept AB in December 2015 and the implementation of their new incentive program after the IPO (Nets, 2017, p.14). As a

79 percentage of revenue, staff costs have during the historical period experienced a decline in its trend from 33% in 2012 to approximately 27.5% in 2015 and 2016. Taking Nets recent business combinations into consideration, such as Storebox APS in late 2015 and Signaturgruppen A/S in mid-2015, as well as Kortaccept AB as mentioned above, we expect some increase in staff costs in the short-to-medium term, but then to remain constant at 28% of revenues in both the long-term and terminal year.

EBITDA b.s.i. margin The company’s EBITDA b.s.i. margin of 35.5% in 2016 had a significant increase compared to 32.9% in 2015. This is mainly due to financial impact from the IPO and the firm’s acceleration in organic growth to 7% in 2016. Moreover, Nets’ focus on operating efficiency since the implementation of the transformation programme in 2014 has accounted for a big part of the positive effect on growth in revenue, thus increasing the firm’s gross profit. This effect is expected to continue. However, taking into consideration the effects from PSD2 in terms of emerging innovation and new entrants which might lead to an increase in external expenses and staff costs, we forecast EBITDA b.s.i. margin to decrease in short-term.

The management’s announcement of no further M&A activities in the medium-term, and the expected decline of restructuring costs related to the firm’s previous business combinations, implies lower expected staff costs in percent of revenues. Hence, we anticipate EBITDA b.s.i. margin to increase in medium-term from 32.7% in 2018 to 33.8% in 2020 where we expect the company to achieve its steady state performance and keep this margin in the terminal.

Depreciation & Amortization In recent years, the company increased its level of investments which led to an increase in underlying depreciation and amortisation by nearly 50% in 2016 of DKK 416M compared to DKK 271M in 2015 (Nets, 2017, p.57). Moreover, business combinations, primarily the acquisition of Kortaccept AB, and the company’s change in structure due to the IPO, escalated the level of amortisation in 2016.

However, considering full amortisation of past M&A’s and the management's announcement of Nets not taking any additional M&A activities in short- and medium-term, we expect that amortisation as a percent of revenues had its peak in 2016 and will thus drop in the forecasted period. Hence, depreciation as a percent of plant and equipment is expected to stay at the same level of 37.1%, and amortisation as a percent of intangible assets will

80 be held constant at 4.8% in our forecasted period. Additionally, we see that amortisation as a percent of revenues was 12.4% in 2016, but then declines in the forecast period to low 11% in 2021, and further below 11% in the terminal year.

EBIT margin In the short-term, we expect the company’s EBIT margin to increase by 4.4% due to the decline in special items, as IPO-related costs are assumed to drop in 2017, and further to zero in 2019. Other special items such as the firm’s transformation programme and restructuring costs related to areas like Nets Technology and Customer Service are also forecasted to decline based on the management’s outlook and target for 2017 and medium- term, respectively.

Moreover, as the costs related to special items are assumed to be zero from 2019 onwards, along with the forecasted growth in revenue, we assume EBIT margin to slightly increase every year up to high 20% in the terminal year. This is due to the firm’s potential market in Sweden and already developed technologies and channels for new trends emerging which we believe Nets could take advantage of in the future. In addition, as the firm already has made a lot of investments, and is positioned as a strong player in the payment industry due to its technology platform as discussed in our strategic analysis in section 6.2.4 and 6.3, we believe revenues will continue to exceed the company’s costs in the future.

NOPAT margin In view of our calculated blended global tax rate of 23%, it could be argued that the amount of tax paid by Nets might decrease in the forecasted period if countries in the Nordic and Europe market lowers their corporate taxes. Based on our external analysis related to the political factors affecting Nets, we believe it is reasonable to assume that the blended global tax rate of 23% will not be dramatically changed considering that The Danish Ministry of Taxation already has lowered the rate by 3%, ref. section 6.2.1. Hence, we expect the global blended tax rate to not have any further impact on the forecasted NOPAT margin.

However, the predicted NOPAT in short-term is reduced by DKK 42M compared to 2016, but this is mostly due to the increased tax on EBIT as a result of our calculated blended global tax rate. On the other hand, taking into account that the company’s EBIT are expected to increase, we assume that Nets NOPAT margin follows the same trend and develops to a higher level of 16% in the terminal year.

Financing Drivers Net interest-bearing debt Considering the company’s outlook for 2017 and the medium-term assuming no M&A activities, we expect NIBD to decline by 17% in short-term to DKK 6,277M, compared to DKK 7,525M in 2016. Considering the planned launch of mobile Dankort and renewal of both NemID contract in Denmark (2017) and BankAxept contract in Norway (2018), we believe Nets will succeed with boosting its revenue as expected, hence lower its NIBD.

Nets’ management has informed in the company’s annual report from 2016 that they see PSD2 as a new opportunity for the company. In the emerging account-to-account ecosystem, the firm plans to deliver commercial services to for example merchants were Nets will enable them with instruments that helps merchants handle all the different payment types. The firm is also planning to offer services to banks so they can securely handle payment requests from TPPs. Moreover, Nets is hoping to guide banks in terms of acting as TPPs themselves. (Nets, 2017, p.29). Based on the aforementioned plans as PSD2 goes into force, we expect Nets to achieve its target NIBD-to-EBITDA b.s.i. ratio of 2.5x in 2017, and thus continue lowering its NIBD throughout the forecasted period as illustrated in Table 26 below.

Table 26 – Forecasted NIBD/EBITDA b.s.i.

Forecast 2017E 2018E 2019E 2020E 2021E 2022E Terminal NIBD / EBITDA b.s.i 2.5 2.4 2.3 2.1 2.0 1.9 1.9 Source: Own production

Furthermore, we estimated Nets future capital structure based on market value to equal 28%, which yields 78% equity and 22% debt. Taking this into consideration as well, we predict a decrease in NIBD by approximately 3% in the medium-to-long term. By 2021, we are convinced that Nets will obtain its target of NIBD-to-EBITDA b.s.i. of around 2.0x and keep a ratio of 1.9x in the terminal. Regarding financial gearing, Nets’ activities is expected to be less funded by leverage in the future. As Table 27 shows, the firm will manage to lower the ratio to 55% in 2017.

Table 27 – Forecasted Financial Gearing

Forecast 2017E 2018E 2019E 2020E 2021E 2022E Terminal Financial Gearing 55% 52% 51% 48% 46% 45% 45% Source: Own production

As the company will strive to achieve a debt-to-equity ratio of approximately 20/80, we predict a result of higher ROE in short-term compared to negative 7.7% in 2016, ref. Figure 17. As the firm gets closer to its goal, return on equity will further increase and Nets will obtain 11.4% in the terminal year.

Table 28 - Forecasted ROE 2017E 2018E 2019E 2020E 2021E 2022 Terminal NOPAT 1031 1126 1213 1302 1353 1391 1430 Average total Equity 10763 11573 11786 12025 12301 12452 12530 ROE 9.6% 9.7% 10.3% 10.8% 11.0% 11.2% 11.4%

Source: Own production

Net financial income/expenses The company’s net financial expenses as a percentage of NIBD has during the three last years fluctuated between approximately 8% and 11%, which gives an average of 9.8% of NIBD. In 2012 and 2013 net financial expenses was 1.2% and 2.1%, respectively. We assume this level could potentially give a wrong impression of the historical average if we include it in our calculation. Hence, we exclude these values in our prediction for the future. Based on this, we have forecasted Nets non-core operations regarding net financial expenses before tax equal to 9.8% of NIBD going forward. This accounting item will decrease throughout the forecast period in line with the expected drop in Nets leverage. Moreover, we predict that the firm will not have any significant refinancing costs in the forecasting period, hence underlining the expected decline in net financial expenses.

Pro forma income statement is summarized in table 29 below.

Table 29 - Pro forma income statement

CORE OPERATIONS (m) 2017E 2018E 2019E 2020E 2021E 2022E Terminal Revenues per business segment Merchant Services 2398 2441 2469 2448 2412 2374 2333 Financial & Network Services 2354 2441 2554 2660 2755 2854 2955 Corporate Services 2891 2992 3085 3204 3310 3420 3532 Net revenues 7643 7873 8109 8312 8478 8647 8820

Cost of sales -1070 -1086 -1103 -1114 -1119 -1141 -1141 Gross profit 6573 6786 7006 7198 7359 7506 7656

External expenses -1873 -1968 -2027 -2078 -2119 -2162 -2205 Staff costs -2140 -2244 -2311 -2327 -2374 -2421 -2470 EBITDA b.s.i 2561 2574 2668 2793 2866 2923 2981 EBITDA b.s.i margin 33.5% 32.7% 32.9% 33.6% 33.8% 33.8% 33.8%

Special items -120 0 0 0 0 0 0 Special items - IPO related costs -30 -30 0 0 0 0 0 EBITDA 2411 2544 2668 2793 2866 2923 2981 EBITDA margin 31.5% 32.3% 32.9% 33.6% 33.8% 33.8% 33.8%

Depreciation -142 -146 -150 -154 -157 -160 -164 Amortisation -925 -931 -938 -943 -948 -952 -957 Impairment losses -11 -11 -11 -11 -11 -11 -11 Sum Depreciation, Amortisation & Impairment-1077 losses -1088 -1099 -1108 -1116 -1124 -1132 EBIT 1333 1456 1569 1684 1750 1799 1850 EBIT margin 17.4% 18.5% 19.3% 20.3% 20.6% 20.8% 21.0%

Effective tax rate 23% 23% 23% 23% 23% 23% 23% Tax om EBIT -302 -330 -356 -382 -397 -408 -420 NOPAT 1031 1126 1213 1302 1353 1391 1430

NON-CORE OPERATIONS 2017E 2018E 2019E 2020E 2021E 2022E Terminal Net financial income/expenses before-740 tax -618 -600 -595 -572 -572 -572 Tax on net financial expenses 168 140 136 135 130 130 130 Net financial income/expenses after tax-572 -477 -464 -460 -442 -442 -442 Profit after tax 458 649 749 842 911 949 988 Source: Own production

9.1.2 Pro Forma Balance Sheet

Investment Drivers Goodwill According to Nets’ latest annual report, the firm informed that impairment tests of goodwill did not show any loss, hence the level of goodwill increased by DKK 74M in 2016 compared to DKK 14,646M in 2015. Moreover, due to Nets’ three business combinations in 2015, the accounting item showed significant rise in goodwill in 2015 and 2016. As a percentage of revenue, goodwill increased by approximately 200% in 2015, compared to the level of 20% of revenues in 2014. In 2016, the level remained constant at roughly 200%.

Furthermore, due to the firm’s high brand awareness in Denmark and Norway, and its long history of good relations, Nets has a solid reputation, as discussed in our VRIO analysis, ref. section 6.3. We believe that this competitive advantage empowers the company with the ability to maintain the same level of goodwill in the forecasted period as in recent years.

In addition, the expected focus on the Swedish market, and Nets’ introduction of improved solutions and new services in terms of e-commerce and mobile payments, strengthens our expectations of high goodwill in the MS business unit. Moreover, the potential growth in the FNS segment due to increased processing volumes as the Nordic market are moving from cash to non-cash payment methods, and thus increasing the need for value added services such as fraud prevention, highlights the firm’s opportunity to keep its level of goodwill, ref. political factors and legislation, section 6.2.1. Last, but not least, considering the expected high degree of clearing due to instant payment solutions across bank accounts especially when PSD2 takes into force, it is reasonable to assume that Nets’ CS business unit will continue to grow, as elaborated in our VRIO analysis in section 6.3. This underlines the company’s ability to maintain its long track-record, and our assumption of no impairment losses on goodwill in the forecasted period.

Intangible and tangible assets Based on our analysis of the firm’s internal resources, we expect that Nets’ good reputation in the Nordic payment industry will continue, and its historical contract extensions regarding digital identification solutions and domestic card scheme to be renewed in 2017 and 2018, ref. section 6.3. Moreover, the management expressed in their business strategy that Nets will continue development within digital innovation, and maintain the firm’s open innovation in order to collect good ideas (Nets, 2017, p.29). With this in mind, we predict other

85 intangible assets to grow in line with the expected revenue by a constant rate of 57% of revenue, same as the level in 2016.

Nets tangible assets, primarily plant and equipment, increased by 1% of revenues in 2016 compared to 2015. According to the company itself, capital expenditures in short-term are expected to be impacted by the firm’s completion of investments taken in 2016, such as the data center in Norway. Further investments and product innovations related to PSD2 within CS is also considered to increase the firm’s level of plant and equipment, and thus potentially contribute with growth in revenues. Taking into account that the rate of plant and equipment in terms of Nets’ revenue has been quite stable during the historical period, ranging between 3.8% and 5.2% of revenue, we expect this accounting item to follow the same trend in the future. Hence, plant and equipment is assumed to increase in line with revenues, and grow constantly at the average rate of 5% of revenue.

Deferred tax assets and liabilities We forecast deferred tax assets and deferred tax liabilities to remain constant throughout our forecast, hence we left it at the same levels as in 2016. However, it is hard to predict when deferred tax assets will be returned to the company, and when deferred tax liabilities will be paid (if ever).

Net Working Capital Nets’ working capital consists of narrow working capital and the firm’s clearing-related balances. Narrow working capital contains Nets’ inventory such as terminals, trade and other receivables as well as payables, and finally prepayments. Clearing-related balances, on the other hand, comprises the value when subtracting settlement obligations and the amount from merchant creditors from settlement assets. (Nets, 2017, p.73)

The company’s net working capital as a percentage of revenue has during the historical period fluctuated between negative 23.2% to negative 2.3%. The creation of negative net working capital appears primarily due to the company’s clearing related balances as Nets processes transactions from merchants, but has not yet settled them. Moreover, settlement terms towards merchants might in some cases exceed settlement terms towards the remittance from banks and card schemes, thus resulting in negative net working capital. (Nets, 2017, p.78).

Nets’ inventories are, as mentioned above, comprised of finished goods like terminals, but also spare parts. With PSD2 opening up for emerging innovations and new players, Nets has expressed that the company is ready to

86 act as a TPP, AISP and PISP in its business strategy in short- and medium-term. Furthermore, the firm has announced that new ideas emerging from Nets’ Digital Lab will go into production in 2017, as mentioned before. Based on the firm’s already action within open innovation and development of new projects we predict that the company’s inventory will increase in line with the growth in revenue as it did in 2016. Inventories is therefore assumed to increase at a constant rate of 0.9% of revenue going forward.

Clearing related assets are predicted to increase in line with the company’s growth in revenue as a result of expected increase in transactions in Nets’ CS business unit. This is due to our belief that account-to-account payments most likely will accelerate in the following years. Based on our analysis comprising threat of substitutes in section 6.1.4, especially considering PSD2, we believe that Nets position in both Denmark and Norway as the main provider of account-to-account payments empowers the company to grow in the long-term. Nets’ announcements of new products such as mobile Dankort and projects that is in the developing and launching stage strengthens this expectation, ref. the Digital Lab. Hence, we forecast clearing related assets to increase by the same level as in 2016, at 60.6% of revenue. This will impact net working capital positively throughout the forecast period and in the terminal year.

Based on the historical period of the company’s operating current liabilities, these accounting lines have been quite stable the last years beside an increase in trade and other payables in 2015 by approximately 40% compared to the year before. However, trade and other payables stabilized in 2016 to the same level of revenue as in 2014, thus we believe this trend will maintain in the forecasted period. Taking into account that operating current liabilities has exceeded the firm’s current assets during the historical period, we predict this trend to continue in the future as this is normal considering the firm’s clearing-related balances. Trade and other payables, and clearing related liabilities is therefore forecasted to grow with a constant rate of 21.9% of revenue and 69.5% of revenue, respectively.

Build on the aforementioned factors, net working capital will remain negative in the forecasted period and in the final terminal year. Moreover, we predict that the value increases negatively by 0.1% each year from negative 16.6% to negative 16.9% in the terminal year.

Dividends According to Nets’ management, the firm will not have any dividend payout in 2017 due to full focus on short- term leverage target of 2.5x, and further medium-term target of 2.0x-2.5x, as mentioned before.

Table 30 - Equity forecast

Equity forecast (m) 2016 2017E 2018E 2019E 2020E 2021E 2022E Terminal Attributable to equity holders 1248 1312 1405 1467 1488 1517 1548 Retained earnings (adjust D/E ratio) 1248 175 52 238 156 Dividends 0 1137 1353 1229 1332 1517 1548 Equity ratio 57% 65% 66% 66% 68% 69% 69% 69% Debt ratio 43% 35% 34% 34% 32% 31% 31% 31% Source: Own production

Assuming no large M&A activities, Nets is planning the first dividend payment in 2018. Based on this, we expect the first payment of DKK 1,137M in dividends to take place in 2018 as illustrated in Table 30 above. Moreover, we predict that Nets is able to continue dividend payments throughout the forecasted period based on the expected healthy economy as well as future return on equity as shows in Table 28 above.

Terminal Growth Rate From year 2022 and into perpetuity, we assume that the growth rate will continue to grow at a steady constant rate into the infinite horizon. Forecasting further into the future will lead to high level of uncertainty, and is thus very abstract. The terminal value accounts for approximately 80% of the total value, and even small changes in the terminal value have a significant impact on the company’s final value. As the terminal growth rate is set to be a constant rate into perpetuity, it is not reasonable to exceed the market growth rate where Nets operates, as it does not make sense to predict that the firm grows faster than the economy in the infinite horizon.

To determine the terminal growth rate, we set it equal to the target inflation rate set by Denmark’s National Bank (2017b), implying a terminal growth rate of 2%. Furthermore, we estimated the average annual inflation in Denmark for the past twenty years, which resulted in 1.9% (Danmarks Statistik, 2017b), hence we find a growth rate of 2% reasonable, see Appendix 13. This is further supported by Nets who states in its annual report that an annual steady 2% growth rate is used to extrapolate the cash flows after the financial budget period (Nets, 2017, p. 87).

Considering that Nets generates significant parts of its revenues in Norway, we have also estimated the Norwegian average annual inflation for the last ten years (as longer period was not available). This resulted in an inflation rate of 2.1%, ref. Appendix 13. (Norges Bank, 2017b). Moreover, the target inflation rate set by Norges Bank equals 2.5% (Norges Bank, 2017a).

Based on the aforementioned, a terminal growth rate of 2% seems like a reasonable estimate. However, determining the terminal growth rate is a difficult task which requires a significant amount of judgement. We have therefore performed a sensitivity analysis of the terminal growth rate which can be found in section 11.4.2.

Our pro forma balance sheet is summarized below.

Table 31 - Pro forma balance sheet

CORE OPERATIONS (m) 2017E 2018E 2019E 2020E 2021E 2022E Terminal Non-current assets Goodwill 14720 14720 14720 14720 14720 14720 14720 Other intangible assets 4357 4487 4622 4738 4832 4929 5028 Plant and equipment 382 394 405 416 424 432 441 Deferred tax asset 376 376 376 376 376 376 376 Total non-current assets 19835 19977 20124 20249 20352 20457 20565

Current assets Inventories 68 70 72 74 76 77 79 Trade and other receivables 819 844 869 891 909 927 945 Clearing-related assets 4634 4773 4916 5039 5140 5242 5347 Prepayments 194 194 194 194 194 198 202 Total current assets 5715 5881 6052 6198 6318 6444 6573

Total operational assets 25550 25858 26175 26447 26670 26902 27138

Non-interest bearing debt Non-current liabilities Deferred tax liabilities 851 851 851 851 851 851 851 Current liabilities Trade and other payables 1670 1721 1772 1817 1853 1890 1928 Clearing-related liabilities 5315 5474 5638 5779 5895 6013 6133 Total current liabilities 6985 7195 7411 7596 7748 7903 8061 Total non-interest bearing debt 7836 8046 8262 8447 8599 8754 8912

Net operating working capital -1270 -1314 -1359 -1398 -1430 -1458 -1487

Invested capital 17714 17812 17913 18000 18072 18148 18226

NON-CORE OPERATIONS (m) Total equity 11437 11710 11863 12187 12414 12491 12569 Net interest bearing debt 6277 6102 6051 5813 5658 5658 5658 Invested capital 17714 17812 17913 18000 18072 18148 18226

Source: Own production

10. Estimating Cost of Capital

10.1 Cost of Debt Risk-Free Rate The risk-free rate is estimated by applying monthly rates of German zero-coupon bond maturing in 10 years during a historical period of 20 years, from 1997 to 2016. Further, by taking the arithmetic average of the 10- year German Eurobond, we obtain a monthly risk free rate of 0.28%. Adjusting it to an annual rate gives us the final estimation of the risk-free rate of 3.4%.

Pre-tax Cost of Debt and Tax Rate Moody’s (2017) assigns Nets a Ba2 rating (medium-grade rating) in its most recent rating, and emphasize that the outlook on the rating is stable. To set the default spread corresponding to this rating, we have used a proxy for the default spread derived from Damodaran (2017b) equal to 3.0%. It is worth mentioning that the default spread published by Damodaran (2017b) are obtained from traded bonds and based on rated companies in the United States, which might be criticized as Nets is a European company. Thus, it represents a possible weakness of our estimated cost of debt. Adding the default spread of 3.0% to the risk-free rate of 3.4%, Nets’ pre-tax cost of debt is measured at 6.4%. This is shown in Table 33 below.

Table 32 - Blended global tax rate

Geographical area Net revenue Weighted amount of Local corporate tax in DKK (m) total net revenues per 2016 Denmark 3576 48.4% 22% Norway 2314 31.3% 25% Finland 885 12.0% 20% Sweden 542 7.3% 22% Baltics (Estonia) 68 0.9% 20% Total 7385 100.00% Blended global rate 23% Source: Own production/ Annual report 2016

In order to set an appropriate tax rate, we have estimated a blended global tax rate as discussed earlier in our paper. Nets generates revenues from five different locations in the Nordics (Nets, 2017). Based on the firm’s net revenue per geographical area and the related local corporate taxes, we have computed a blended global tax rate equal to 23%. As Table 32 highlights, the rate is built upon the weighted average of each revenue per

91 geographical area proportion of total net revenues and its respective local corporate taxes. We believe this gives a stronger estimate of the corporate tax rate as various geographies are taken into consideration. Finally, we adjust the cost of debt by subtracting the blended global tax rate of 23% and obtain an after-tax cost of debt equal to 4.9%, as illustrated in Table 33.

Table 33 - Cost of Debt

Cost of Debt Credit Rating Ba2 Proxy for Default Spread 3.0% Risk Free 3.4% Pre-tax Cost of Debt 6.4% Blended Global Tax Rate 23 % After-tax Cost of Debt 4.9%

Source: Own production/ Moody’s, 2017/ Damodaran, 2017b

10.2 Cost of Equity Market Risk Premium The market portfolio’s risk premium is estimated as the difference between the European stock markets historical returns and historical yield on a 10 year German Government bond, based on a period of 20 years back in time. By looking at a time period of 20 years (1997-2016) in order to predict future results, it is reasonable to assume that most trends have been smoothed out. When measuring the risk premium using historical data, the well-diversified MSCI Europe Index is used as a proxy for the market portfolio, as Nets’ close competitors are geographically exposed in Europe.

Furthermore, we have implied the total return index (TRI) of MSCI Europe in order to get a more precise estimate. According to MSCI Index Definitions February 2015, TRI measures a market's price performance with the income from constituent dividend payments. By considering MSCI total return, a more accurate performance is presented, as we assume that dividends are reinvested. Hence, we examine the stocks in the index which do not issue dividends, but rather reinvest their earnings. MSCI Europe Total Return Index will hereafter be referred to as “MSCI Europe Index”. As Table 34 lays out, taking the arithmetic averages multiplied by 12, market risk premium is estimated to be 4.6%.

Table 34 - Market Risk Premium

Monthly Annual Average MSCI-Europe return 0.7% 8.0% Average 10Y German bond 0.3% 3.4% Market risk premium 0.4% 4.6% Source: Datastream

By looking at different literature regarding market risk premium, we find that an estimate of 4.6% is reasonable. To exemplify, Koller et al. (2010) argues that an appropriate market risk premium is in the range between 4.5% and 5.5%. Moreover, based on a survey PWC Denmark does annually, the latest estimated market risk premium is in the interval from 4.5% to 8.0%, where the average market risk premium as of February 2016 is 5.6%. (PWC, 2016). By looking even further back in time (1970-2002), the Danish National Bank estimated the historical risk premium on Danish shares to be approximately 5% per year, which further supports our argument (Nationalbanken, 2003).

Systematic Risk on Equity - Levered Beta In section 4, we identified Nets’ closest peers to be Worldpay Group Plc, Paysafe Group Plc, Wirecard AG and Worldline S.A. Two of the competitors, Worldpay Group Plc and Wordline S.A., have not been listed on stock exchange for more than 15 months and 2.5 years respectively, during our historical period. This could lead to imprecise measurements of beta. We have excluded Worldpay due to its limited data, but chosen to include Worldline as the firm has the same business mix as Nets across all three business units, and at least 50% of the data points recommended by Koller et al. (2010), ref. section 5.3.2.

The three competitors’ stock returns are regressed against both the regional MSCI Europe Index and the well- diversified MSCI World Index, from January 31st 2012 to December 30th 2016. In addition, as the comparable firms are located in different geographical areas, we wish to run a regression against their local market indexes as well, in order to measure the robustness and volatility of our further estimation of equity beta. As mentioned above, we will use TRI of the market indexes as it presents a more accurate performance.

Table 35 illustrates raw betas obtained from the Table 35 - Raw betas from peers Y Paysafe Wirecard Wordline competitors. Regarding the local indexes, Paysafe Group X1 MSCI Europe 0.120 0.300 0.676 Plc from UK is regressed against FTSE100 (RI), Wirecard AG X2 MSCI World -0.140 0.272 0.542 from Germany is regressed against DAXINDX (RI), and X3 Local Index 0.269 0.465 0.464 finally Wordline S.A. from France is regressed against Source: Own production FRCAC20 (RI).

Due to the fact that both Nets and the comparable firms mainly operates in Europe and the Nordics, we believe that the most precise raw betas detected above are the once obtained from the regression with MSCI Europe Index. Additionally, Koller et al. (2010, p.253) argues that a local market index is not optimal because this measurement will not illustrate the market-wide systematic risk, but rather the firm’s sensitivity to only one particular industry. Hence, we will use raw beta estimates relative to MSCI Europe Index in our further analysis.

We wish to graph the corresponding beta values over the chosen historical period in order to identify the extent of volatility in estimated raw betas. This is done by “rolling regression” for every 12th month, which is illustrated in Figure 20 below. See Appendix 10 for rolling regressions against MSCI World and local indexes.

Figure 20 - Twelve months rolling regressions – Paysafe, Wirecard & Worldline 12 months rolling regressions: 12 months rolling regressions: 12 months rolling regressions: Paysafe vs. MSCI Europe Wirecard vs. MSCI Europe Worldline vs. MSCI Europe β β β 2.0 1.5 1.6 1.5 1.0 1.4 1.0 1.2 0.5 0.5 1.0 0.0 0.0 -0.5 0.8 -0.5 -1.0 0.6 Paysafe Wirecard Worldline -1.5 -1.0 0.4 -2.0 -1.5 0.2 -2.5 -3.0 -2.0 0.0 MSCI Europe MSCI Europe MSCI Europe

Source: Own production

From the graphs above, we can see that the betas from Paysafe Group Plc, Wirecard AG and Worldline S.A are highly volatile, implying a weakness for our further estimation of Nets’ relevered beta. Before we move on with these estimates, we wish to perform rolling regressions with two American companies as well, VISA and Mastercard, as these firms represents a high level of competition (regarding international card scheme), but are

94 not prioritized as the focus has been on European companies. Hence, this is done in order to strengthen the credibility of our estimates. The 12 months rolling regressions against MSCI Europe is graphed in Figure 21 below. See Appendix 11 for rolling regressions against MSCI World and S&P 500 Index.

Figure 21 - Twelve months rolling regressions - VISA & Mastercard

VISA vs. MSCI Europe Mastercard vs. MSCI Europe β β 1.2 1.6 1.0 1.4 0.8 1.2 0.6 1.0 0.4 0.8 VISA 0.2 0.6 Mastercard 0.0 0.4 -0.2 0.2 -0.4 0.0 MSCI Europe MSCI Europe

Source: Own production

Figure 21 shows highly volatile betas of VISA and MasterCard as well. Therefore, despite the fact that there is much uncertainty, our average beta estimate based on Paysafe Group Plc, Wirecard AG and Worldline S.A gives us a more viable estimate. Second, this is further supported by the rolling betas of both VISA and MasterCard against MSCI World Index and S&P 500 Index, as it shows high volatility too, ref. Appendix 11. In other words, given the high volatility of our chosen European comparable firms, our beta estimate is seen as adequate.

Table 36 - Nets' unlevered beta & adjusted beta

Comparable firms Country Raw beta Local corporate tax Capital Structure Unlevered beta Paysafe Group Plc. UK 0.12 20.0% 21.4% 0.10 Wirecard AG Germany 0.30 29.7% 9.2% 0.28 Worldline S.A. France 0.68 33.3% 0.7% 0.67 Industry unlevered beta 0.35

Nets AS Capital Structure 28% Blended global rate 23% Industry unlevered beta 0.35 Levered beta 0.43 Adjusted Beta 0.62

Source: Own production

Based on the chosen method to estimate Nets’ systematic risk, we obtained an equity beta equal to 0.62 as shown in Table 36. This illustrates that on average Nets is less risky than the market. An equity beta below 1 could be explained by the fact that payment methods represents a type of service consumers always will be dependent on regardless of the economies condition, for example the use of payment card to purchase food. Hence, it is reasonable to assume that payment methods are to some extent independent of the stock market’s value, and therefore we will use a beta of 0.62 in further estimations.

Within the “Information Services” industry, Professor Damodaran (2017c) has calculated an industry beta based on 64 companies where Nets and its comparable firms are included. An unlevered beta of 0.84 and a levered beta of 0.98 is suggested (Damodaran, 2017a). We choose not to take Damodaran’s findings into consideration because we find it not reasonable to mix our estimation with the “Information Services” industry as some firms might not necessarily represent any direct competition to Nets. Please see section 11.4.1 for sensitivity analysis and further discussion regarding credibility of Nets estimated beta.

Concluding Cost of Equity Considering Nets’ systematic risk estimated at 0.62, we assume that payment methods could be somewhat independent of the economic condition in the market, as discussed in the section above. Based on our risk-free rate of 3.4% and market risk premium equal to 4.6%, we finally measure Nets cost of equity equal to 6.2%.

Table 37 - Cost of Equity

Cost of Equity Risk-free rate 3.4% Market Risk Premium 4.6% Adjusted Beta 0.62 Cost of Equity 6.2% Source: Own production

10.3 Capital Structure In terms of Nets’ target capital structure, as discussed earlier in our paper, Nets outlook and targets for 2017 regarding expected NIBD-to-EBITDA b.s.i. will be around 2.5x including the effect of approximately DKK 150M from share buyback in order to cover long-term incentive program. Additionally, we assume no further M&A

96 activities are planned. Regarding medium-term, the firm announces that they are hoping to obtain a NIBD-to- EBITDA b.s.i. ratio between 2.0x-2.5x. Moreover, as no dividend payments will be completed before the leverage target of 2.0x-2.5x is gained, Nets hopes to reduce its debt in the following years, hence increasing the level of equity in the company. (Nets, 2017, p.17 and p.50).

From the annual report of 2016, the firm has total loans and borrowings equal to DKK 9,420M and market capitalization measured to DKK 24,800M. This gives a debt-to-equity ratio equal to approximately 38%. Taking the company’s medium-term target of 2.0x-2.5x into account, we believe that Nets target capital structure will be reduced to a debt-to-equity ratio of 28%.

10.4 Conclusion Weighted Average Cost of Capital Due to expected changes in Nets capital structure for 2017 and in the medium-term, we believe the company will obtain a debt-to-equity ratio of 28% in the terminal. Cost of debt in the medium-to-long term is assumed to be in line with the calculated interest rate on debt of 6.4% due to a stable blended global tax rate computed per 2016. Hence, the weighted average cost of capital is expected to be constant at approximately 5.9% in years to come, as shown in Table 38 below.

Table 38 - Conclusion WACC

Adj. beta D/E Debt ratio Equity ratio CoD CoE Blended global rate WACC 0.62 28 % 22 % 78 % 6.4 % 6.2 % 23 % 5.9 % Source: Own production

11. Valuation

11.1 Pro Forma Cash Flow Statement In order to calculate our EV of Nets, we need to forecast the FCFF. Together with our strategic and financial analysis, we forecasted the company’s financial and operational activities in the balance sheet and income statement. Going forward, we will base our calculation of the FCFF on these statements.

Table 39 below illustrates the predicted level of capital expenditure in the firm. In our belief, Nets will have a stable capital expenditure by approximately 12% of revenue during the forecasted period. This due to expected open innovations and product developments within the firm's technology platform, in order to stay competitive as PSD2 changes the payment industry. Based on this, CAPEX in Table 39 will negatively impact the FCFF.

Table 39 - Capital Expenditures

Capital Expenditures (m) 2017E 2018E 2019E 2020E 2021E 2022E Terminal Change in non-current assets -158 -142 -146 -126 -103 -105 -107 Depreciation, Amortisation & Imp.losses 1077 1088 1099 1108 1116 1124 1132 CAPEX 919 946 952 983 1013 1019 1024 Capex as a % of net revenues 12.0% 12.0% 11.7% 11.8% 11.9% 11.8% 11.6% Source: Own production

Considering the expected results of more cost efficiency due to stable and lower cost margins in the future, NOPAT will increase, hence positively impact the FCFF as shown in. However, by adding back forecasted depreciation, amortisation and impairment losses, we manage to isolate FCFF from profits obtained from operations, and thus examine how net working capital affects the company. The change in net working capital is positive throughout the forecasted period expressing the increase in negative net working capital. As elaborated in section 9.1.2, this is due to Nets clearing-related balances and the predicted increase within clearing as a result of expected rise in transaction volume.

In sum, we believe Nets will manage to create positive free cash flows as of 2017 and going forward. This is shown in Table 40 below. Table 40 - Free Cash Flow to Firm

PRO FORMA CASH FLOW STATEMENT (m) 2017E 2018E 2019E 2020E 2021E 2022E Terminal NOPAT 1031 1126 1213 1302 1353 1391 1430 Depreciation, Amortisation & Imp.losses 1077 1088 1099 1108 1116 1124 1132 Change in net operating working capital 59 44 45 39 32 29 29 CAPEX -919 -946 -952 -983 -1013 -1019 -1024 Free Cash Flow to Firm (FCFF) 1248 1312 1405 1467 1488 1517 1548

Source: Own production

11.2 Discounted Cash Flow (DCF) model

Table 41 - Discounted Cash Flow model

Discounted Cash Flow model (m) 31.12.2016 2017E 2018E 2019E 2020E 2021E 2022E Terminal Free cash flow to firm (FCFF) 1248 1312 1405 1467 1488 1517 1548 WACC 5.9% 5.9% 5.9% 5.9% 5.9% 5.9% 5.9% Discount factor 0.94 0.89 0.84 0.79 0.75 0.71 Present value, FCFF 1178 1169 1182 1165 1115 1073 Present value of FCFF in forecast horizon 6881 Growth terminal period 2.0% Present value of FCFF in terminal period 27,800 Estimated value of enterprise 34,681 Net interest-bearing debt 7525 Estimated market value of equity 27,156 Number of shares outstanding (m) 200.4 Estimated share price DKK 135.5 Terminal value as % of EV 80.2% Source: Own production/ Petersen & Plenborg, 2012

The DCF model is based on the estimated FCFF during the forecasting period, calculated in section 11.1. Estimated WACC is used to discount the FCFF in order to calculate an estimated EV of DKK 34,681M per 31.12.2016. To calculate the market value of equity, it is necessary to deduct the market value of NIBD from the estimated EV. As already mentioned, we use the book value of NIBD as a proxy for the market value. This leads us to an estimated market value of equity of DKK 27,156M as shown in Table 41. Finally, this amount is divided by the number of outstanding shares, resulting in an estimated share price of DKK 135.5 per December 31st, 2016.

11.3 Relative Valuation - Multiples Before we conclude on our valuation of Nets and present an investment recommendation, we will perform a relative valuation using multiples in order to stress test our valuation based on the DCF approach. For our relative valuation analysis, we will use a peer group comparison consisting on listed companies within the payment industry. We believe the chosen companies share (some) fundamental characteristics with Nets, and are thus sensitive to same trends and technological changes that form the global payment industry. The multiples from peers are based on Bloomberg estimates from 2016. Moreover, we have applied the harmonic mean when valuing Nets based on multiples, as research has proved that this yield more accurate estimates (Petersen & Plenborg, 2012, p. 234).

Table 42 - The relative valuation - multiples

The relative valuation approach Enterprise-value-based multiples Equity-value-based mult. EV/NOPAT EV/EBIT EV/EBITDA EV/Revenue EV/IC P/E M/B Terminal providers: Veriforne Systems -1630.3* 30.1 11.6 1.6 1.7 25.7 2.0 Ingenico Group 27.6 15.5 12.1 2.7 2.2 24.2 2.7 Merchant acquirers: Worldpay Group Plc. 24.3 41.3 22.8 7.0 21.0 40.9 7.2 First Data 19.2 26.5 13.5 2.7 1.4 21.3 3.4 Oracle Corporation 106.1 11.0 9.1 4.0 11.2 17.0 3.5 PayPal 28.6 27.8 19.6 4.4 2.5 37.1 3.6 Vantiv 35.2 31.2 19.0 4.3 3.3 64.3 8.0 Evertec 19.4 17.3 10.6 4.8 2.3 13.1 10.6 Payment processors: Wordlline S.A. 17.5 19.9 14.8 2.4 2.0 31.7 3.0 Visa 23.3 19.1 18.1 12.4 3.2 30.5 5.9 MasterCard 24.2 20.1 16.5 10.6 9.6 27.1 19.6 Online payment service providers: Wirecard AG 22.2 24.6 18.7 5.5 2.2 35.1 3.4 Paysafe Group Plc. 17.1 34.2 21.5 4.9 1.7 270.7 1.8 Harmonic mean 24.1 21.7 14.8 3.8 2.6 28.1 3.7 Nets 32.3 36.8 13.2 4.7 2.0 29.9 2.7

* Not included in the average Source: Own production/ Bloomberg

100

As seen from the table above, Nets’ EV/NOPAT, EV/EBIT and EV/Revenue multiples are higher than the harmonic mean, expressing that the firm is either overpriced or it could imply that investors’ values the company higher than its competitors. Our strategic analysis has shown that Nets is the number one market leader in the Nordics in addition to being active across the entire payment value chain. This suggests that investors might value some extra aspects to the company.

Table 43 - Share price based on relative valuation

The relative valuation approach Enterprise-value-based multiples Equity-value-based mult. EV/NOPAT EV/EBIT EV/EBITDA EV/Revenue EV/IC P/E M/B Estimated share price 91.2 64.6 155.9 102.9 191.0 -84.3 188.3

Average share price excl. P/E 132.3 Source: Own production/ Bloomberg

The estimated share price based upon P/E ratio is negative due to a negative earnings-per-share of 3 (see Appendix 14), so this value is excluded in the average share price calculation.

The share prices based on multiples varies from DKK 64.6 to DKK 188.3. The EV/EBITDA multiples are unbiased regarding capital structure and measures operating performance, hence considered as the best multiple when it comes to valuations among companies (Koller et al., 2010, p.314). Moreover, this multiple provides a share price closest to the one we estimated in the DCF model, equal to DKK 155.9.

When excluding the share price based on the P/E multiple, we estimate an average share price of DKK 132.3 as laid out in Table 43 above. See Appendix 15 for detailed calculations. This price is quite close to the estimated fair value obtained in our DCF model, and thus supports our fundamental valuation to some extent. However, the multiples provide a significant spread in share price which makes the relative valuation approach less reliable. Therefore, we conclude that the estimates yield inconsistent results. The wide range in share prices based on multiples are most likely due to the fact that the chosen companies in Table 42 is not identical to Nets. As mentioned earlier in the paper, it is hard to find good comparable companies, which is reflected by the spread in share prices.

101

Generally speaking, a possible weakness of how we have performed the relative valuation is due to the use of current versus expected earnings. We acknowledge that future earnings most likely result in more accurate value estimates than current earnings. (Petersen & Plenborg, 2012, p. 233).

11.4 Sensitivity Analysis

When valuing Nets’ share price in section 11.2, the estimates used is based on information from our strategic and financial analysis. With this in mind, they could be influenced by our subjective opinion, and thus might be biased. Therefore, the valuation is associated with uncertainty, which is the reason we perform a sensitivity analysis on our estimated share price from the DCF valuation. By doing this, we check for simultaneous and robustness of the value drivers in our valuation model, which again will disclose uncertainty related to different value drivers and their importance.

Factors used in the sensitivity analysis below are beta, risk free rate, terminal growth rate, WACC, and EBITDA b.s.i. margin. Furthermore, as Nets generates revenues in several currencies, we have also performed sensitivity analysis which illustrates foreign exchange sensitivity (NOK, SEK and EUR) to net revenue and EBITDA b.s.i. in 2017E.

11.4.1 Risk-free rate vs. beta

Table 44 - Risk-free rate vs. beta

Beta 135.50 0.24 0.38 0.50 0.62 0.74 0.86 1.00 1.4% 606.4 400.4 306.0 245.0 202.4 170.9 143.2 2.1% 398.1 292.8 236.0 195.9 165.9 142.8 121.7 Risk-free 2.7% 291.5 227.6 189.7 161.2 139.1 121.4 104.7 3.4% 226.8 183.8 156.7 135.5 118.5 104.4 91.0 4.0% 183.2 152.4 132.1 115.7 102.1 90.8 79.6 4.7% 152.0 128.8 113.0 99.9 88.9 79.5 70.1 5.3% 128.4 110.3 97.7 87.0 77.9 70.0 62.1 Source: Own production

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Beta Even though we performed a comprehensive and carefully thought out analysis when calculating WACC in section 10, it is still an estimated value. Primarily because Nets was a private company until September 2016 and is geographical exposed, we come across some challenges regarding estimation of the different components used to calculate WACC. In section 10.2, we estimated Nets’ unlevered beta from comparable companies followed by adding the firm’s financial risk to the average unlevered beta. By relying on estimates from peer group, there are some uncertainty as none of the comparable firms have identical business profiles as Nets, and might thus in reality be different from our estimated beta of 0.62. Professor Damodaran (2017a) estimated the levered beta close to 1 within the “Information Services” where he includes Nets, so the analysis will also illustrate how a beta close to the industry’s will impact the share price. As Table 44 above lays out, the share price with a beta between 0.62 and 1 varies between DKK 91 and DKK 135.5.

Risk-free rate

Our derived risk-free rate was estimated based on a 20-year average return on Table 45 - 10-year German gov. bond 10-year German government bond in section 10.1. This value is higher than the observed 10-year German government bond rate in recent years. Table 45 highlights the average 10-year German government bond observed in the last 10 years, which is significantly lower than our estimated value. By looking at a period of 5 and 10 years, the annual average is 0.9% and 2.1%, respectively. Comparing our estimate with a period of 10 years is considered as most suitable, and a risk-free rate of 2.1% is therefore included in the sensitivity analysis shown in Table 44 above. We see that a risk-free rate of 2.1% gives a share price of DKK 195.9, everything else alike.

Source: Own production/ Datastream

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Petersen and Plenborg (2012, p.251) argues that the risk-free rate should be Table 46 - 20-year Danish gov.bond estimated based on government bond yields denominated in the same currency as the underlying cash flows, suggesting that a 10-year Danish government bond should have been used in order to estimate an appropriate risk-free rate. As Table 46 shows, the estimated risk-free rate would in this case also been lower than the one we have estimated. A 10-year average return on Danish 10-year government bond rate equals 2.3%. The share price here varies between DKK 161.2 and DKK 195.9, everything else alike, ref. Table 44.

All in all, this indicates that our valuation of Nets is sensitive to changes in beta and risk-free rate, and thus variations in the different components used to Source: Own production/ calculate WACC. This will be taken into account in the sensitivity analysis Danmarks Statistik, 2017a below.

11.4.2 Terminal growth rate vs. WACC

Table 47 - Terminal growth rate vs. WACC

WACC in terminal period 135.50 7.4% 6.9% 6.4% 5.9% 5.4% 4.9% 4.4% 0.5% 69.2 77.0 86.2 97.2 110.6 127.1 147.9 1.0% 74.8 83.7 94.4 107.4 123.4 143.6 169.9 Terminal 1.5% 81.3 91.7 104.3 119.9 139.5 165.0 199.3 growth 2.0% 89.1 101.4 116.4 135.5 160.2 193.6 240.8 2.5% 98.5 113.1 131.6 155.7 188.1 233.9 303.8 3.0% 109.9 127.9 151.2 182.7 227.3 295.1 410.5 3.5% 124.3 147.0 177.5 220.8 286.7 398.8 630.8 Source: Own production

In our DCF model presented in section 11.2, our terminal value accounts for 80.2% of Nets’ EV. Hence, our valuation is highly sensitive to fluctuations in the terminal growth rate. Even though we believe the terminal growth rate is justified, it still entails uncertainty as the estimated share price is highly dependent on it. However, as the suggested growth rate is somewhat low, we expect that the upside is larger than the downside.

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The matrix above illustrates that the share price decreases if cost of capital increases, and vice versa. If we use the average market risk premium suggested by PwC (2016) of 5.6%, it results in an estimated WACC of 6.4% in the terminal period. A WACC of 6.4% gives an estimated share price of DKK 116.4, hence a decrease in share price by 16.4%. This sensitivity analysis underlines thus how great impact the terminal growth rate and WACC has on the final value of the firm.

11.4.3 Terminal growth rate vs. EBITDA b.s.i. margin

Table 48 - Terminal growth rate vs. EBITDA b.s.i. margin

EBITDA b.s.i. % 135.5 40% 38% 36% 34% 32% 30% 28% 0.5% 126.7 116.9 107.1 97.2 87.4 77.6 67.8 1.0% 139.5 128.8 118.1 107.4 96.7 86.0 75.3 Terminal 1.5% 155.3 143.5 131.7 119.9 108.1 96.3 84.4 growth 2.0% 175.1 161.9 148.7 135.5 122.3 109.1 95.9 2.5% 200.6 185.6 170.6 155.7 140.7 125.7 110.8 3.0% 234.7 217.4 200.1 182.7 165.4 148.0 130.7 3.5% 282.9 262.2 241.5 220.8 200.1 179.4 158.7 Source: Own production

Our previous analysis came up with an EBITDA b.s.i. margin of approximately 34% in the terminal period. In contrast to our analysis, Nets’ management team announced that their long-term EBITDA b.s.i. margin target is high 30s. Moreover, Nets’ share price performance is very sensitive to variations in EBITDA b.s.i. margin, so it is therefore important for us to examine what impact it will have on Nets’ share price if our assumptions are wrong. The matrix above symbolizes that if EBITDA b.s.i. margin increases, the share price increases as well.

All in all, we can see how crucial it is to estimate good predictions for WACC, growth and EBITDA margin, as these key value drivers have a huge impact on Nets’ estimated share price. We expect the realistic range in the three sensitivity analyzes above to be in the innermost square, suggesting that the fair share price should be in the interval between DKK 102.1 and DKK 189.7. The sensitivity analysis performed in this section highlights how important it is to use other valuation methods as well, like the Relative Valuation approach, in order to substantiate our predictions.

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11.4.4 Net revenues & EBITDA b.s.i. sensitivity to currency variations

Table 49 - EBITDA b.s.i. sensitivity to NOK, SEK and EUR

NOK 2017E 2017E 2017E SEK 2017E 2017E 2017E EUR 2017E 2017E 2017E DKK Net revenues EBITDA b.s.i. % impact DKK Net revenues EBITDA b.s.i. % impact DKK Net revenues EBITDA b.s.i. % impact 1.14 7812 2617 2.2% 1.20 7681 2573 0.5% 0.126 7675 2571 0.4% 1.16 7767 2602 1.6% 1.22 7671 2570 0.4% 0.127 7667 2568 0.3% 1.18 7725 2588 1.1% 1.24 7662 2567 0.2% 0.128 7659 2566 0.2% 1.20 7683 2574 0.5% 1.26 7652 2564 0.1% 0.129 7651 2563 0.1% 1.22 7643 2561 0.0% 1.28 7643 2561 0.0% 0.130 7643 2561 0.0% 1.24 7605 2548 -0.5% 1.30 7635 2558 -0.1% 0.131 7636 2558 -0.1% 1.26 7567 2535 -1.0% 1.32 7626 2555 -0.2% 0.132 7629 2556 -0.2% 1.28 7531 2523 -1.5% 1.34 7618 2552 -0.3% 0.133 7621 2553 -0.3% 1.30 7496 2511 -1.9% 1.36 7610 2550 -0.4% 0.134 7614 2551 -0.4% Source: Own production/ Danmarks Nationalbank, 2017a

We use the three tables above to illustrate how sensitive Nets is to variations in currencies. The light blue line expresses the currency rate at our valuation date December 31st 2016. As explained in our PEST analysis in section 6.2.2, the company is mainly exposed to currencies in NOK, SEK and EUR. In Figure 12 in the PEST analysis, we have illustrated how Nets’ net revenues is distributed between the different currencies, and concluded that the DKK/NOK exchange rate represents its biggest exposure. The distribution of net revenues and thus EBITDA b.s.i. among the different countries is taken into account in Table 49 above.

As expected, Nets’ EBITDA b.s.i. is most sensitive to changes in the NOK/DKK exchange rate, second sensitive to the SEK/DKK exchange rate, and then the EUR/DKK. Everything else alike, if the DKK/NOK drops from 1.22 to 1.14 in 2017, EBITDA b.s.i. will increase with 2.2%. And the opposite, if the exchange rate rise from 1.22 to 2.30 in 2017, it will have a negative impact on EBITDA b.s.i. by 1.9%.

In sum, due to the de facto “fixed-rate policy” Denmark maintains against the EUR, and the low sensitivity to SEK, the Norwegian Krone against the Danish Krone is the main currency rate that is worth monitoring for Nets in years to come.

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11.5 Scenario Analysis The following section will examine what happens to Nets in case our assumptions take a different direction than we predicted. Our calculations will be based on a hypothetical situation, and best guess estimates is used in order to obtain an even stronger understanding of potential outcomes. Using the DCF model with same WACC and terminal growth as the base case (5.94% and 2% respectively), we consider the three following scenarios: adapting to PSD2, the Swedish growth opportunity, and a possible BankAxept contract loss.

11.5.1 Scenario 1 - Adapting to PSD2

The question whether Nets succeeds in becoming the partner of choice for TPPs is of high relevance when predicting the firm’s future, ref. section 3.2 which elaborates on this issue. To examine what the regulatory impact of PSD2 is on Nets, we will in the following examine possible scenarios regarding the adjusting to PSD2.

PSD2 - Bull Best case scenario for the company is to become a partner and provider of technology emerging from new entrants. Nets should as early as possible take the position as the most desirable platform for its former customers, and for the market’s new players, such as AISPs and PISPs.

The forecast section might be a bit pessimistic considering all the opportunities PSD2 is bringing to the market. The potential best case for Nets in relation to PSD2 is to self become both a PISP and an AISP. By acting as a PISP, Nets will be able to initiate payments via an online portal such that transactions can go directly from the payer’s bank account to an e-merchant. This will bring revenues significantly up especially due to expected rise in online shopping. Moreover, if the company succeeds in becoming an AISP as well, Nets will have the opportunity to develop new services that is more customized to each consumer, as the firm will be in possession of account information and transaction history. This will result in a stronger customer-relationship for Nets, and thus a higher potential to grow at a faster speed than the average Nordic payment industry.

By doing so, Nets will obtain a significant growth in revenues as it provides instruments for distributors of products such as banks, but also offers services for new entrants. Hence, the company will have succeeded in acting as an ally in the emerging account-to-account ecosystem, as well as a technology provider. The positive development in revenues will empower the company with greater ability to further develop their technology

107 platform in order to ensure trust and security. With growth in revenues, Nets will also be capable of being more innovative and improve its operational activities in order to reduce costs.

Table 50 - PSD2 - Bull case

Bull case (m) 2017E 2018E 2019E 2020E 2021E 2022E Net revenues 7680 8064 8548 9061 9605 10181 NOPAT 1039 1186 1349 1533 1696 1871 FCFF 1286 1498 1741 1950 2137 2180 EBITDA b.s.i. margin 33.5% 33.0% 33.5% 34.5% 35.0% 35.5% Estimated enterprise value 48646 Estimated share price 205 Upside compared to base case 51% Source: Own production

As seen from Table 50 above, successful positioning in the changed Nordic payment industry will yield a much higher estimated share price of DKK 205. These input factors are quite optimistic though, as it is the absolutely best scenario for Nets in terms of PSD2. Net revenues are expected to increase by approximately 38% during the forecast period compared to 2016. Moreover, EBITDA b.s.i. margin is expected to be around 2% greater than in our base case.

PSD2 - Bear As TPPs offer their solutions in the market for account-based payments across borders and on a sizeable range, domestic card schemes could experience significantly more pressure than predicted. If payment volumes from card payments faces a dramatic shift towards online and mobile payment services, revenues within FNS segment might potentially drop. Moreover, it could be argued that Nets’ position in the market related to the firm’s domestic card scheme and all-in-one solution becomes weak due to merchants choosing other account-to- account instruments from new entrants. This could result in a decrease of Nets’ power in the payment industry, and thus exceptionally reduce revenues within the MS business unit as well.

Another important factor in order to keep the position as the partner of choice for banks, merchant, corporates and new entrants, is the ability to obtain a strong infrastructure security. As discussed before, value added services might experience an increased demand, hence expecting a high level of robustness in the firm’s IT infrastructure. Despite the fact that Nets has passed the (PCI) Data Security Standards, ref. section 6.2.1, the future is never truly predictable, and given the high uncertainty regarding TPPs getting access to customer’s

108 online account information, Nets could have misjudged the requirements for security in their risk-related solutions. If this is the case, the company’s costs related to production and product development in terms of external expenses would rise, hence impacting the company’s cost efficiency negatively.

Table 51 - PSD2 - Bear case

Bear case (m) 2017E 2018E 2019E 2020E 2021E 2022E Net revenues 7607 7683 7721 7721 7706 7675 NOPAT 1023 1014 925 925 922 869 FCFF 1209 1075 956 925 910 875 EBITDA b.s.i margin 33.5% 31.5% 29.5% 29.5% 29.5% 28.7% Estimated enterprise value 21627 Estimated share price 70 Downside compared to base case -48% Source: Own production

Based on the worst case scenario above, Table 51 illustrates the impact on estimated share price if this scenario occurs. As seen from the estimations presented in the table, growth in revenues have failed leading to a decline in EBITDA b.s.i. margin. This will also impact the company’s level of NOPAT, thus resulting in decreasing FCFF and a valuation of DKK 70 per share, which is a downside by 48% compared to our base case.

11.5.2 Scenario 2 - The Swedish opportunity

One of the key opportunities mentioned in our SWOT analysis is the possibility to continuously grow in Sweden. Sweden is the largest Nordic economy (Nordea Markets, 2016, p.4), and in our opinion, Sweden is considered as the most important growth potential for Nets. To explore how this possibly could impact Nets’ value, we will perform a best and worst case scenario depending on whether the company manages to take Sweden by storm or suffers from poor Swedish execution.

Sweden - Bull Currently, Nets is the market leader in Denmark and Norway, and number two in Sweden. As mentioned earlier, Nets has already experienced a significant growth in the Swedish market. Especially the positive effect from the acquisition of Nordea Merchant Acquiring services contributed to the revenue growth in recent years. Additionally, based on our Porter’s Five Forces analysis, we see an opportunity to grow in the Swedish customer base in the MS segment, as well as taking over several issuer processing outsourcing contracts from the Swedish banks, and thus increase the growth in the FNS segment as well.

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In this scenario, we expect Nets to take a strong position in the Swedish market as well as becoming number one payment provider there. If the company successfully expand its customer base in the MS segment in addition to take over more processing contracts in the FNS segment in Sweden, we expect Nets to generate higher net revenues. With increased revenues, further investments in the firm’s activities can be undertaken such as implementing robots, and thus be more cost efficient going forward. Growth in revenues combined with better operating leverage impacts EBITDA b.s.i. margin positively to 37.2% in 2022E compared to 33.8% in the base case. The estimated share price equals DKK 197, suggesting an upside of 45%.

Table 52 - The Swedish opportunity - Bull case

Bull case (m) 2017E 2018E 2019E 2020E 2021E 2022E Net revenues 7754 8142 8549 8977 9425 9897 NOPAT 1116 1311 1442 1556 1676 1929 FCFF 1422 1625 1772 1903 2040 2081 EBITDA b.s.i margin 34.5% 34.7% 34.9% 35.1% 35.3% 37.2% Estimated enterprise value 46921 Estimated share price 197 Upside compared to base case 45%

Source: Own production

As we base this scenario on both successfully growth in Sweden and a reduction of costs, there is a high level of uncertainty and our improved cost level might be too optimistic. Nevertheless, this is a best case scenario for a strategy that aims to increase the EBITDA b.s.i. margin over time.

Sweden - Bear Our bear case sees Nets experience a poor Swedish execution, slowing down the growth in revenues significantly. The lower growth combined with increased investments costs after failed Swedish expansion will reduce EBITDA b.s.i. margin in 2022E to 31.8%.

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Table 53 - The Swedish opportunity - Bear case

Bear case (m) 2017E 2018E 2019E 2020E 2021E 2022E Net revenues 7422 7459 7496 7534 7571 7723 NOPAT 981 1036 1050 1041 1031 1063 FCFF 1018 1066 1080 1071 1062 1083 EBITDA b.s.i margin 33.5% 32.7% 32.4% 32.1% 31.8% 31.8% Estimated enterprise value 25073 Estimated share price 88 Downside compared to base case -35% Source: Own production

Again, we acknowledge there is uncertainty about the input parameters, but it is somewhat a good illustration of what happens if the company does not manage to increase its market share in Sweden. As laid out in Table 53, the estimated share price equals DKK 88 indicating a downside of 35 % compared to our base case of DKK 135.5.

11.5.3 Scenario 3 - Renewal of BankAxept contract

BankAxept - Bear In our Porter’s Five Forces analysis, we argued that the contract of the Norwegian card scheme, BankAxept, is expected to be renewed as of 2018. However, considering that Norwegian banks owns BankAxept in Norway, their power in terms of choosing the operator of the card scheme is relatively strong. Based on this, a potential scenario could be that Nets faces rejection of the contract renewal despite its long track record as producer of BankAxept. This might result in a significant reduction in FNS revenues and thus impact the company’s growth in revenues to a much lower level than expected.

Table 54 - Renewal of BankAxept contract - Bear case

Bear case (m) 2017E 2018E 2019E 2020E 2021E 2022E Net revenues 7533 7608 7684 7761 7839 7917 NOPAT 1006 1069 1102 1149 1166 1183 FCFF 1133 1130 1164 1211 1229 1258 EBITDA b.s.i margin 33.5% 32.7% 32.6% 33.1% 33.1% 33.1% Estimated enterprise value 21352 Estimated share price 107 Downside compared to base case -21% Source: Own production

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As Table 54 shows, the estimated FCFF is growing at a slower speed compared to our base case. In 2022E the amount resulted in DKK 1,258M while in base case it was DKK 1,548M the same year. Due to lower revenues than what the firm might have expected in the nearest future, potential projects and product development will cost much more than predicted, resulting in a weakened EBITDA b.s.i. margin of 0.7 % in long-term. The downside compared to base case is 21% and yields a valuation of DKK 107 per share. In comparison to our scenarios above, however, this bear case is not as critical as the failure in terms of PSD2 and the Swedish market opportunity.

11.6 Summary Valuation The theoretical approaches used in this section yielded different values. Our DCF model suggested a fair share price of DKK 135.5, while the relative valuation approach based on multiples resulted in different values with an average share price of DKK 132.3. The sensitivity analyzes emphasized that Nets share price is very sensitive to changes in the underlying value drivers, and suggested a valuation range from DKK 102.1 to DKK 189.7. Furthermore, the scenario analyzes illustrated that the price range in the optimistic and pessimistic cases fluctuate between DKK 70 and DKK 205, implying high sensitivity to changes in main value drivers as well.

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12. Discussion

Nets’ listed price at Nasdaq December 31st 2016 was DKK 123.6. We have estimated a fair share price of DKK 135.5, emphasizing that there is a potential 9.6% upside in the share price. As discussed in section 2.2, the share price fell by 17.6% after the IPO (from September 23rd to December 31st). This decrease was most likely affected by news flows around Nets during this period, mainly regarding Bambora’s acquiring of MobilePay and Nordea who discontinued its peer-to-peer scheme with Swipp (Deutsche Bank Markets Research, 2016, p. 49).

Among investment bank analysts, the target share price range between DKK 104 and DKK 160. The interval is large and implies that the market is constantly evolving and the industry is affected by change in market conditions, which is illustrated in our sensitivity analysis. Moreover, the average share price from the investment banks equals DKK 137.6, implying that there is a potential upside in the share price, which further supports our result.

Table 55 - Target price comparison

Target price comparison Investment bank Target price Nordea 140 DNB 143 Macquarie 117 Barclays 104 Deutsche Bank AG 150 J.P.Morgan Cazenove 130 UBS 140 Morgan Stanley 160 Jyske Bank 154 Average 137.6 Our estimate 135.5 Source: Nordea Markets, 2016/ DNB Markets, 2017/ Macquarie Research, 2016/ Barclays Capital Inc., 2016/ Deutsche Bank Markets Research, 2016/ J.P. Morgan Cazenove, 2016/ UBS Limited, 2016/ Morgan Stanley, 2016/ Jyske Bank, 2016

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13. Conclusion

The intention with our thesis was to find the fundamental value of Nets’ equity and the fair value of the company’s share price in light of the digital disruption. With a broad specter of end-to-end IT solutions, Nets’ existence has excelled in the Nordic payment industry. Our analysis of the payment industry in the Nordics revealed a localized industry, comprised by integrated and specialized players which handles and delivers a vast range of electronic transactions in the payment value chain. The global trend of digitization has led to the rise of a new financial value chain, splitting the business models in either open or closed. As being active across the entire value chain, Nets is taking the position as a platform player, aiming towards an open business model.

Further, our strategic analysis brought to light the firm’s ability to quickly adopt new technology, contributing to its good reputation and long track-record of contracts. As the only provider of the National Clearing system and digital identification solution as well as domestic card schemes in Denmark and Norway, Nets shows great potential to continue growth and thus product development. The outsourcing trend among banks grants Nets with opportunities to expand its geographical area to further market share in Sweden. Going forward, the company is well positioned to succeed in being more cost efficient, considering the implementation of robots and improved clearing system.

On the other hand, increased competition from new players and substitute products in relation to PSD2, could outplay Nets. However, the company can benefit from the increased focus on security such as fraud prevention, and its solutions will empower merchants, banks and corporates to better handle the different types of payments. The main goal for Nets is to become the partner of choice for third-party providers.

In our financial analysis, we saw that the exceptional increase in transaction volumes due to change in consumer behavior from cash- to non-cash payments has improved net revenues throughout the historical period. However, technology development and heavy rise in invested capital due to substantial investments in intangible assets, resulted in a remarkable lower ROIC in 2015 and 2016. EBITDA b.s.i. margin has continuously been improved to strong 35.5% in 2016. This is due to Nets’ high focus on customers and end-users. Implementation of the Transformation programme improved efficiency, and increased revenues, implying strong control on special items. The finalization of the IPO in September 2016 improved Nets’ capital structure remarkably.

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Assuming no M&A activities in short-to-medium term, Nets’ target capital structure is thus 28%, concluding on the appropriate discount rate of 5.9% for potential investors.

Based on the DCF model, the aforementioned factors led us to an estimated share price of DKK 135.5. The findings in our cash flow model was supported by the relative valuation approach. We stress tested our findings by diverse sensitivity and scenario analysis. Our computed share price is sensitive to changes in beta and risk free rate, as well as WACC estimates. Moreover, EBITDA is highly sensitive towards changes in the NOK/DKK exchange rate. Scenario analyzes revealed that the downside from losing against new entrants in relation to PSD2 exceeds the downside from not succeeding in the Swedish market.

Conclusions made above and throughout our paper, grants us with the confidence that there is a slight upside in Nets fair share price on December 31 2016 of 9.6%, and we recommend potential investors to buy.

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Thomson ONE Banker

Thomson Reuters Datastream

Excel

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15. Appendix

Appendix 1 – Table of tables ...... 122 Appendix 2 - Table of figures ...... 123 Appendix 3 - Table of equations ...... 124 Appendix 4 – Porter’s Five Forces ...... 124 Appendix 5 – Reformulated income statement ...... 125 Appendix 6 - Reformulated balance sheet ...... 126 Appendix 7 - Formulas used in the paper...... 127 Appendix 8 - Indexing and common-size analysis of revenues and operating expenses ...... 129 Appendix 9 - Indexing and common-size analysis of Invested capital ...... 130 Appendix 10 - 12 months rolling reg.: Paysafe, Wirecard and Worldline against MSCI World & local indexes . 131 Appendix 11 - 12 months rolling reg.: VISA and MasterCard against MSCI world and S&P 500 Index ...... 131 Appendix 12 - Forecast assumptions ...... 132 Appendix 13 - Average annual inflation in Denmark and Norway ...... 133 Appendix 14 - Calculating earnings-per-share (EPS) ...... 133 Appendix 15 - Nets share price based on multiples ...... 133

Appendix 1 – Table of tables

Table 1 – Financial highlights ...... 7 Table 2- Ownership structure ...... 9 Table 3 - Comparison of business segments ...... 11 Table 4 - The card-based payment process ...... 13 Table 5 - The most common account-based payments ...... 13 Table 6 - Newly regulated service providers/issuers under PSD2 ...... 16 Table 7 - Key European competitors ...... 21 Table 8 - Advantages and Disadvantages of Multiples ...... 35 Table 9 - Summary Porter's Five Forces ...... 42 Table 10 - Summary of VRIO analysis ...... 54 Table 11 - Special items ...... 56 Table 12 – Classification of Amortisation, Depreciation and Impairment losses ...... 56 Table 13 - Classification of financial income and expenses...... 58 Table 14 - Turnover ratio and profit margin ...... 63 Table 15 - Gross margin ...... 63 Table 16 - EBITDA b.s.i. margin ...... 63 Table 17 - Business segments historical development ...... 64 Table 18- Net interest bearing debt to EBITDA b.s.i ratio ...... 66 Table 19 - Financial Gearing ...... 67 Table 20 - ROIC, NBC and Spread ...... 68 Table 21- Trade and other payables ...... 69 Table 22 - Liquidity cycle ...... 70 Table 23 - Liquidity cycle in light of net revenues ...... 70 Table 24 - SWOT ...... 74

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Table 25 - Revenues per business unit in % and millions ...... 78 Table 26 – Forecasted NIBD/EBITDA b.s.i...... 82 Table 27 – Forecasted Financial Gearing ...... 82 Table 28 - Forecasted ROE ...... 83 Table 29 - Pro forma income statement ...... 84 Table 30 - Equity forecast ...... 88 Table 31 - Pro forma balance sheet ...... 90 Table 32 - Blended global tax rate ...... 91 Table 33 - Cost of Debt ...... 92 Table 34 - Market Risk Premium ...... 93 Table 35 - Raw betas from peers ...... 94 Table 36 - Nets' unlevered beta & adjusted beta ...... 95 Table 37 - Cost of Equity ...... 96 Table 38 - Conclusion WACC ...... 97 Table 39 - Capital Expenditures ...... 98 Table 40 - Free Cash Flow to Firm ...... 98 Table 41 - Discounted Cash Flow model...... 99 Table 42 - The relative valuation - multiples ...... 100 Table 43 - Share price based on relative valuation ...... 101 Table 44 - Risk-free rate vs. beta ...... 102 Table 45 - 10-year German gov. bond ...... 103 Table 46 - 20-year Danish gov.bond ...... 104 Table 47 - Terminal growth rate vs. WACC...... 104 Table 48 - Terminal growth rate vs. EBITDA b.s.i. margin ...... 105 Table 49 - EBITDA b.s.i. sensitivity to NOK, SEK and EUR ...... 106 Table 50 - PSD2 - Bull case ...... 108 Table 51 - PSD2 - Bear case ...... 109 Table 52 - The Swedish opportunity - Bull case...... 110 Table 53 - The Swedish opportunity - Bear case ...... 111 Table 54 - Renewal of BankAxept contract - Bear case ...... 111 Table 55 - Target price comparison ...... 113

Appendix 2 - Table of figures

Figure 1 – Structure of thesis ...... 4 Figure 2 – Historical timeline ...... 6 Figure 3 – Share price development ...... 7 Figure 4 – Nets’ share price performance relative to OMXC20 and MSCI Europe ...... 8 Figure 5 - Share of net revenues per business segment ...... 9 Figure 6 - The new financial value chain ...... 17 Figure 7 - Payment value chain ...... 18 Figure 8 - Nordic acquirers by total number of transactions acquired ...... 40 Figure 9 - Share of card transactions incl. and excl. domestic card schemes ...... 41 Figure 10 - Dankort transactions vs. GDP ...... 45 Figure 11 – BankAxept transactions vs. GPD ...... 45 Figure 12 - Net revenue per geographical area ...... 46

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Figure 13 - Contactless Dankort transactions ...... 47 Figure 14 - ROIC vs. WACC ...... 62 Figure 15 - Historical EBITDA b.s.i. per unit ...... 65 Figure 16 - EBITDA, EBIT, Profit & NOPAT ...... 65 Figure 17- ROE ...... 67 Figure 18 - Inventory days and Trade & other receivable days ...... 68 Figure 19 - Current ratio ...... 71 Figure 20 - Twelve months rolling regressions – Paysafe, Wirecard & Worldline ...... 94 Figure 21 - Twelve months rolling regressions - VISA & Mastercard ...... 95

Appendix 3 - Table of equations

Equation 1 - Weighted Average Cost of Capital ...... 28 Equation 2 - Cost of Debt ...... 28 Equation 3 - Cost of Equity ...... 30 Equation 4 - Levered beta ...... 31 Equation 5 - Adjusted beta ...... 31 Equation 6 - Free Cash Flow to Firm & Capital Expenditures ...... 33 Equation 7 - Enterprise value ...... 33

Appendix 4 – Porter’s Five Forces

Source: Petersen and Plenborg, 2012

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Appendix 5 – Reformulated income statement

CORE OPERATIONS (m) 2012 2013 2014 2015 2016 Revenues per business unit Merchant Services na 1860 1687 1866 2317 Financial & Network Services na 1914 2097 2206 2273 Corporate Services na 2953 2762 2764 2795 Net revenues 5962 6727 6546 6836 7385

Cost of sales -1082 -1138 -1081 -983 -963 Gross profit 4880 5589 5465 5853 6422

External expenses -1815 -1989 -1846 -1732 -1769 Staff costs -1988 -2075 -1956 -1873 -2034 EBITDA b.s.i 1077 1525 1663 2248 2619 EBITDA b.s.i margin 18.1% 22.7% 25.4% 32.9% 35.5%

Special items -201 -411 -538 -345 Special items - IPO related costs -261 EBITDA 1077 1324 1252 1710 2013 EBITDA margin 18.1% 19.7% 19.1% 25.0% 27.3%

Depreciation -167 -189 -149 -143 -142 Amortisation -163 -252 -257 -711 -917 Impairment losses -6 -7 -2 -44 -11 Sum Depreciation, Amortisation & Impairment losses -336 -448 -408 -898 -1070 EBIT 741 876 844 812 943 EBIT margin 12.4% 13.0% 12.9% 11.9% 12.8%

Effective tax rate 28.0% 32.4% 30.1% 77.3% 22.0% Tax om EBIT -324 -314 -296 -895 129 NOPAT 417 562 548 -83 1072

NON-CORE OPERATIONS (m) Net financial income/expenses before tax 225 31 89 -289 -1639 Tax on net financial expenses 56 20 15 491 -17 Net financial income/expenses after tax 281 51 104 202 -1656 Profit after tax 698 613 652 119 -584 Source: Own production/ Nets Annual Reports 2012-2016

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Appendix 6 - Reformulated balance sheet

CORE OPERATIONS (m) 2012 2013 2014 2015 2016 Non-current assets Goodwill 934 719 1318 14646 14720 Other intangible assets 1124 1017 1164 4722 4198 Plant and equipment 416 310 278 263 383 Deferred tax asset 95 76 97 205 376 Total non-current assets 2569 2122 2857 19836 19677

Current assets Inventories 184 131 84 67 66 Trade and other receivables 612 645 702 832 801 Clearing-related assets 6278 5037 5092 3705 4477 Tax receivables 16 0 0 0 0 Prepayments 196 221 184 153 194 Total current assets 7286 6034 6062 4757 5538

Total operational assets 9855 8156 8919 24593 25215

Non-interest bearing debt Non-current liabilities Deferred tax liabilities 140 115 139 1480 851 Provision from non-current liabilities 7 0 0 0 0 Current liabilities Trade and other payables 1133 1138 1312 1863 1614 Clearing-related liabilities 7323 6411 4902 4483 5135 Deferred income 15 0 0 0 0 Total current liabilities 8471 7549 6214 6346 6749 Total non-interest bearing debt 8618 7664 6353 7826 7600

Net operating working capital -1185 -1515 -152 -1589 -1211

Invested capital 1237 492 2566 16767 17615

NON-CORE OPERATIONS (m) 2012 2013 2014 2015 2016 Equity Share capital 184 184 184 50 200 Reserves 2150 2108 2161 4266 9405 Deferred consideration for business combinations 0 0 21 163 284 Equity, owners of Nets A/S 2334 2292 2366 4479 9889 Non-controlling interests 0 15 21 664 201 Total equity 2334 2307 2387 5143 10090

Net interest-bearing debt Interest-bearing debt Current tax liabilities 129 166 152 20 59 Borrowings (bank loans) 981 988 635 14573 9329 Borrowings (bank overdrafts) 220 480 1506 0 91 Liabilities associated with assets held for sale 0 530 0 0 Derivative financial instruments 0 0 0 24 0 Pension liabilities, net 98 71 69 59 66 Other financial liabilities 0 0 0 1913 1064 Total interest-bearing debt 1428 1758 2362 16589 10609

Interest-bearing assets Securities 715 585 0 0 0 Investment in associates 32 22 24 227 231 Other financial assets 18 0 0 2428 957 Cash and cash equivalent 1760 2374 2159 2310 1869 Derivative financial instruments 0 0 0 0 27 Assets held-for-sale 0 592 0 0 0 Total interest-bearing assets 2525 3573 2183 4965 3084 Net interest-bearing debt -1097 -1815 179 11624 7525 Invested capital 1237 492 2566 16767 17615 Source: Own production/ Nets Annual Reports 2012-2016

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Appendix 7 - Formulas used in the paper

127

Source: Petersen & Plenborg, 2012

128

Appendix 8 - Indexing and common-size analysis of revenues and operating expenses

Indexing (trend analysis) of revenues & operating exp. (m) 2012 2013 2014 2015 2016 Net revenues 100% 113% 110% 115% 124% Cost of sales 100% 105% 100% 91% 89% Gross profit 100% 115% 112% 120% 132% External expenses 100% 110% 102% 95% 97% Staff costs 100% 104% 98% 94% 102% EBITDA before special items 100% 142% 154% 209% 243% Special items na na na na na Special items - IPO related costs na na na na na EBITDA 100% 123% 116% 159% 187% Depreciation 100% 113% 89% 86% 85% Amortisation 100% 155% 158% 436% 563% Impairment losses 100% 117% 33% 733% 183% Sum Depreciation, Amortisation & Impairment losses 100% 133% 121% 267% 318% EBIT (Operating income) 100% 118% 114% 110% 127% Income tax (corporation tax) 100% 110% 105% 151% -42% Profit from associates after tax 100% 20% 43% -10% 13% Profit from divestment of business na na na na na Tax shield, net financial expenses 100% 36% 27% 872% -31% NOPAT 100% 135% 131% -20% 257% Common-size analysis of revenues & operating expenses (m) 2012 2013 2014 2015 2016 Net revenues 100% 100% 100% 100% 100% Cost of sales -18% -17% -17% -14% -13% Gross profit 82% 83% 83% 86% 87% External expenses -30% -30% -28% -25% -24% Staff costs -33% -31% -30% -27% -28% EBITDA before special items 18% 23% 25% 33% 35% Special items 0% -3% -6% -8% -5% Special items - IPO related costs 0% 0% 0% 0% -4% EBITDA 18% 20% 19% 25% 27% Depreciation -3% -3% -2% -2% -2% Amortisation 3% -4% -4% -10% -12% Impairment losses 0% 0% 0% -1% 0% Sum Depreciation, Amortisation & Impairment losses -6% -7% -6% -13% -14% EBIT (Operating income) 12% 13% 13% 12% 13% Income tax (corporation tax) -4% -4% -4% -6% 2% Profit from associates after tax 1% 0% 0% 0% 0% Profit from divestment of business 0% 0% 1% 0% 0% Tax shield, net financial expenses -1% 0% 0% -7% 0% NOPAT 7% 8% 8% -1% 15% Source: Own production/ Nets Annual Reports 2012-2016

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Appendix 9 - Indexing and common-size analysis of Invested capital

Indexing (trend analysis) of invested capital (m) 2012 2013 2014 2015 2016 Non-current assets Goodwill 100% 77% 141% 1568% 1576% Other intangible assets 100% 90% 104% 420% 373% Plant and equipment 100% 75% 67% 63% 92% Deferred tax asset 100% 80% 102% 216% 396% Total non-current assets 100% 83% 111% 772% 766% Current assets Inventories 100% 71% 46% 36% 36% Trade and other receivables 100% 105% 115% 136% 131% Clearing-related assets 100% 80% 81% 59% 71% Tax receivables 100% na na na na Prepayments 100% 113% 94% 78% 99% Total current assets 100% 83% 83% 65% 76% Total operational assets 100% 83% 91% 250% 256% Non-interest bearing debt Non-current liabilities: Deferred tax liabilities 100% 82% 99% 1057% 608% Provision from non-current liabilities 100% na na na na Current liabilities Trade and other payables 100% 100% 116% 164% 142% Clearing-related liabilities 100% 88% 67% 61% 70% Deferred income 100% na na na na Total non-interest bearing debt 100% 89% 74% 91% 88% Invested capital (net operating assets) 100% 40% 207% 1355% 1424%

Common-size analysis of invested capital (m) 2012 2013 2014 2015 2016 Invested capital 1237 492 2566 16767 17615 Non-current assets Goodwill 76% 58% 107% 1184% 1190% Other intangible assets 91% 82% 94% 382% 339% Plant and equipment 34% 25% 22% 21% 31% Deferred tax asset 8% 6% 8% 17% 30% Total non-current assets 208% 431% 111% 118% 112% Current assets Inventories 15% 11% 7% 5% 5% Trade and other receivables 49% 52% 57% 67% 65% Clearing-related assets 508% 407% 412% 300% 362% Tax receivables 1% 0% 0% 0% 0% Prepayments 16% 18% 15% 12% 16% Total current assets 589% 488% 490% 385% 448% Total operational assets 797% 659% 721% 1988% 2038% Non-interest bearing debt Non-current liabilities: Deferred tax liabilities 11% 9% 11% 120% 69% Provision from non-current liabilities 1% 0% 0% 0% 0% Current liabilities Trade and other payables 592% 518% 396% 362% 415% Clearing-related liabilities 1% 0% 0% 0% 0% Deferred income 697% 620% 514% 633% 614% Total non-interest bearing debt 697% 620% 514% 633% 614% Net working capital -96% -122% -12% -128% -98% Invested capital (net operating assets) 100% 40% 207% 1355% 1424%

Source: Own production/ Nets Annual Reports 2012-2016

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Appendix 10 - 12 months rolling reg.: Paysafe, Wirecard and Worldline against MSCI World & local indexes

Source: Own production/ Datastream

Appendix 11 - 12 months rolling reg.: VISA and MasterCard against MSCI world and S&P 500 Index

Source: Own production/ Datastream

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Appendix 12 - Forecast assumptions

Value drivers 2012 2013 2014 2015 2016 Average 2017E 2018E 2019E 2020E 2021E 2022E Terminal Financial value drivers Organic growth na na na 6.0% 7.0% 6.5% Revenue growth 7.0% 12.8% -2.7% 4.4% 8.0% 5.7% 3.5% 3.0% 3.0% 2.5% 2.0% 2.0% 2.0% Cost drivers (margins) Cost of sales as a % of revenue 18.1% 16.9% 16.5% 14.4% 13.0% 15.8% 14.0% 13.8% 13.6% 13.4% 13.2% 13.2% 13.2% External expenses as a % of revenue 30.4% 29.6% 28.2% 25.3% 24.0% 27.5% 24.5% 25.0% 25.0% 25.0% 25.0% 25.0% 25.5% Staff costs as a % of revenue 33.3% 30.8% 29.9% 27.4% 27.5% 29.8% 28.0% 28.5% 28.5% 28.0% 28.0% 28.0% 28.6% EBITDA margin (excl. special items) 18.1% 22.7% 25.4% 32.9% 35.5% 26.9% 33.5% 32.7% 32.9% 33.6% 33.8% 33.8% 33.8% Special items as a % of revenue 0.0% -3.0% -6.3% -7.9% -8.2% -5.1% -2.0% -0.4% 0.0% 0.0% 0.0% 0.0% 0.0% EBITDA margin (incl. special items) 18.1% 19.7% 19.1% 25.0% 27.3% 21.8% 31.5% 32.3% 32.9% 33.6% 33.8% 33.8% 33.8% Depreciation as a % of plant & equipment 40.1% 61.0% 53.6% 54.4% 37.1% 49.2% 37.1% 37.1% 37.1% 37.1% 37.1% 37.1% 37.1% Amortisation as a % of intangible assets 7.9% 14.5% 10.4% 3.7% 4.8% 8.3% 4.8% 4.8% 4.8% 4.8% 4.8% 4.8% 4.8% EBIT margin 12.4% 13.0% 12.9% 11.9% 12.8% 12.6% 17.4% 18.5% 19.3% 20.3% 20.6% 20.8% 21.0% Tax rate 28.0% 32.4% 30.1% 77.3% 22.0% 38.0% 22.7% 22.7% 22.7% 22.7% 22.7% 22.7% 22.7% NOPAT margin 7.0% 8.3% 8.4% -1.2% 14.5% 7.4% 13.5% 14.3% 15.0% 15.7% 16.0% 16.1% 16.2% Investment drivers Goodwill as a % of revenue 15.7% 10.7% 20.1% 214.2% 199.3% 92.0% Other intangible assets as a % of revenue 18.9% 15.1% 17.8% 69.1% 56.8% 35.5% 57.0% 57.0% 57.0% 57.0% 57.0% 57.0% 57.0% Plant & equipment as a % of revenue 7.0% 4.6% 4.2% 3.8% 5.2% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% Deferred tax assets as a % of revenues 1.6% 1.1% 1.5% 3.0% 5.1% 2.5% 4.9% 4.8% 4.6% 4.5% 4.4% 4.3% 4.3% Non-current assets as a % of revenue 43.1% 31.5% 43.6% 290.2% 266.4% 135.0% 66.9% 66.8% 66.6% 66.5% 66.4% 66.3% 66.3% Net working capital decomposed into: Inventories as a % of revenue 3.1% 1.9% 1.3% 1.0% 0.9% 1.6% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9% Trade & other receivables as a % of revenue 10.3% 9.6% 10.7% 12.2% 10.8% 10.7% 10.7% 10.7% 10.7% 10.7% 10.7% 10.7% 10.7% Clearing related assets as a % of revenue 105.3% 74.9% 77.8% 54.2% 60.6% 74.6% 60.6% 60.6% 60.6% 60.6% 60.6% 60.6% 60.6% Other current assets as a % of revenue 3.6% 3.3% 2.8% 2.2% 2.6% 2.9% 2.6% 2.6% 2.6% 2.6% 2.6% 2.6% 2.6% Deferred tax liabilities as a % of revenue 2.3% 1.7% 2.1% 21.7% 11.5% 7.9% 11.5% 10.8% 10.5% 10.2% 10.0% 9.8% 9.6% Trade and other payables as a % of revenue 19.0% 16.9% 20.0% 27.3% 21.9% 21.0% 21.9% 21.9% 21.9% 21.9% 21.9% 21.9% 21.9% Clearing related liabilities as a % of revenue 122.8% 95.3% 74.9% 65.6% 69.5% 85.6% 69.5% 69.5% 69.5% 69.5% 69.5% 69.5% 69.5% Net working capital as a % of revenue -10.0% -22.5% -2.3% -23.2% -16.4% -14.9% -16.6% -16.7% -16.8% -16.8% -16.9% -16.9% -16.9% Financing drivers NIBD as a % of invested capital -88.7% -368.9% 7.0% 69.3% 42.7% -67.7% 35.4% 34.3% 33.8% 32.3% 31.3% 31.2% 31.0% Net financial expenses as a % of NIBD 0.5% 2.1% -10.6% -7.9% -11.0% -5.4% -9.8% -9.8% -9.8% -9.8% -9.8% -9.8% -9.8% Source: Nets Annual Reports 2012-2016/ Own production

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Appendix 13 - Average annual inflation in Denmark and Norway

Average annual inflation Year Denmark Norway 2016 0.3% 3.5% 2015 0.5% 2.3% 2014 0.6% 2.1% 2013 0.8% 2.0% 2012 2.4% 1.4% 2011 2.8% 0.1% 2010 2.3% 2.8% 2009 1.3% 2.0% 2008 3.4% 2.2% 2007 1.7% 2.8% 2006 1.9% 2.2% 2005 1.8% na 2004 1.2% na 2003 2.1% na 2002 2.4% na 2001 2.4% na 2000 2.9% na 1999 2.5% na 1998 1.8% na 1997 2.2% na Average 1.9% 2.1%

Source: Danmarks Statistik, 2017b and Norges Bank, 2017b.

Appendix 14 - Calculating earnings-per-share (EPS)

Source: Own production/ Nets Annual Report 2016

Appendix 15 - Nets share price based on multiples

31.12.2016 EV/NOPAT EV/EBIT EV/EBITDA EV/Revenue EV/IC P/E M/B Nets EV 25800.0 20468.5 38772.7 28151.1 45809.5 EPS -3.0 Book value/share 50.3 NIBD 7525.0 7525.0 7525.0 7525.0 7525.0 Equity = EV - NIBD 18275.0 12943.5 31247.7 20626.1 38284.5 Shares outstanding (million) 200.4 200.4 200.4 200.4 200.4 200.4 200.4 Share price 91.2 64.6 155.9 102.9 191.0 -84.3 188.3 Average excl. P/E 132.3 Source: Own production

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